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Inflation figure turns positive

Published 16/06/2015

Figures for May are forecast to show a positive reading of 0.1% - the first time it will have turned higher since last October
Figures for May are forecast to show a positive reading of 0.1% - the first time it will have turned higher since last October

The UK's brush with negative inflation came to an end after just a month as it rose to 0.1% in May, official figures have shown.

Slides in food and fuel prices have started to ease off, meaning the Consumer Prices Index (CPI) measure of inflation rose for the first time since October, according to the Office for National Statistics (ONS).

CPI had fallen to minus 0.1% in April - the first time it had been negative since 1960. The rise to a positive reading of 0.1% was in line with City expectations.

ONS statistician Philip Gooding said: "Last month CPI turned negative, mainly because of falling transport fares due to the timing of Easter. This month, that fall has been reversed.

"In addition, the falls in food and fuel costs over the last year have eased this month, helping to push inflation up."

Chancellor George Osborne said: "Today we see further evidence of an economic plan that is working, with a powerful mix of low prices and rising wages, which are continuing to grow well above inflation.

"This is good news for working people and family budgets, and shows the economic recovery is going from strength to strength.

"Of course the job is not done and we will continue to remain vigilant to all risks, particularly when the global economic situation is so uncertain."

The ONS figures showed food prices were up by 0.1% during May, the first month-on-month rise since last December, suggesting a period of plunging prices is easing off after a fierce supermarket price war sparked by the rise of discounters Aldi and Lidl.

Food prices were still 1.7% lower year-on-year, but this level of deflation was the weakest since November.

May also saw a rise in petrol prices by 2.5p per litre, compared with a smaller rise of 0.4p a year ago.

The overall effect of food and fuel on the headline figure was still negative, pulling CPI down by around 0.5%. But this was less pronounced than the month before when it had a negative effect of 0.7%.

Meanwhile core inflation - excluding the volatile effects of energy, food, alcohol and tobacco - rose to 0.9% from 0.8% the month before.

Prices for clothing and footwear also rose after falling a year ago, particularly for women's outerwear.

Air fares rose 8% year-on-year, the biggest rise since April last year - affected by the timing of Easter.

Retail Prices Index inflation, a separate measure which includes housing costs, was 1% in May, up from 0.9% in April.

The Bank of England has said it expects CPI to pick up "notably" towards the end of this year as the effect of falling food and fuel prices fades.

Low inflation is good for consumers because it means wage rises are worth more in real terms, with one report suggesting they are growing at the fastest rate in eight years.

But despite this positive effect, a return to price rises will be welcomed by policy makers.

That is because it will allay fears that the economy will sink into a damaging spiral of falling prices - delaying spending and investment and making the real cost of repayments on debts such as mortgages more expensive.

On the other hand, Bank of England officials will also be looking to prevent inflation surging too high further down the track as they aim to keep it around the target level of 2%.

This will guide thinking on when they should lift interest rates, which have been held at 0.5% for more than six years. A first rise is currently seen as likely in mid-2016.

Samuel Tombs, senior UK economist at Capital Economics, said: "May's UK consumer prices figures confirmed that deflation lasted for just one month, but the big picture is that inflation is likely to remain extremely low throughout the rest of 2015.

"We had anticipated a bigger rise in core inflation since April's rate had been depressed by the earlier fall of Easter this year compared to last.

"The UK's weak inflation outlook is likely to ensure that the Monetary Policy Committee keeps interest rates at their record low level for another year or so."

Howard Archer, chief UK and European economist at IHS Global Insight, said: "UK deflation proved both marginal and fleeting as consumer prices rose 0.1% year on year in May.

"We doubt that deflation will recur in the UK, although it cannot be completely ruled out if oil prices take a renewed appreciable downward lurch (which seems unlikely).

"With consumer price inflation still only 0.1% in May and likely to trend up pretty gradually, consumers' purchasing power should be healthy - especially as earnings growth is likely to see further increases."

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