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Inflation to hold steady despite higher oil prices

The cost of living fell unexpectedly in April, but some economists are expecting it to rise again.

Inflation is set to hold steady at 2.4% when official data is published this week, despite a jump in oil prices contributing to the cost of petrol rocketing.

A consensus of economists are predicting inflation to have held firm in May, even as petrol prices are expected to register the steepest month-on-month rise for seven years.

Oil prices were rising in May following US President Donald Trump’s decision to walk away from the Iran nuclear deal, raising the prospect of a disruption in supply from the Middle East.

Brent crude is currently trading at around 76 US dollars per barrel, but almost touched 80 US dollars last month.

We expect to see the largest recorded month-to-month rise in petrol and diesel prices since 2011 Economist Victoria Clarke

Some economists think inflation could tick upwards, with EY Item Club’s Howard Archer saying it could be as high as 2.6%, flagging higher pump prices.

“The RAC has reported that petrol prices rose by 6p a litre in May – the biggest monthly increase since the RAC began tracking prices 18 years ago,” he said.

“Average petrol prices hit 129.4p a litre, while average diesel prices also rose by 6p to 132.3p a litre.”

Victoria Clarke, economist at Investec, said: “We expect to see the largest recorded month-to-month rise in petrol and diesel prices since 2011, with this pushing up the 12-month inflation rate by some 0.15 percentage points.

“Secondly, airfares look set to return to follow their more predictable seasonal pattern, with Easter behind us.”

Inflation unexpectedly fell in April to its lowest level for more than a year, despite firms increasing prices on soft drinks after the introduction of the sugar tax.

Air fares were a significant downwards pressure on the rate of inflation due to the early timing of Easter, but households took a hit on their utility bills as electricity, gas and other fuel prices rose 5.7% annually.

With inflation remaining above the Bank of England’s 2% target, this week’s update could put pressure on the bank’s Monetary Policy Committee (MPC) to raise interest rates in August.

The central bank backed away from an expected hike earlier in the year due to sluggish growth in the first quarter, keeping rates at 0.5%.

Adding further fuel to the case for a hike has been a trio of recent solid readings from the services, manufacturing and construction sectors, which suggest the economy could grow by between 0.3% and 0.4% in the second quarter.

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