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UK Inflation at 2.0%, Unlikely to Bother the Bank of England

Retail inflation

Image © Andrey Armyagov, Adobe Stock

The Consumer Prices Index (CPI) measure of inflation increased 2.0% year-on-year in May 2019, down from 2.1% in April 2019 reports the ONS.

The data means inflation is currently sitting on the Bank of England's 2.0% target, with the release coming just a day ahead of the Bank's June policy meeting.

"Decent news for the Bank of England and consumers as consumer price inflation dips to 2.0% in May from 2019-high of 2.1% in April, helped by sharp monthly drop in air fares as impact of later Easter this year drops out," says Howard Archer, Chief Economic Advisor to the EY ITEM Club.

The impact on Sterling of the data has been negligible as markets had been expecting a reading of 2.0%. But while market expectations were met, other data sets suggest inflation pressures are growing.

Core CPI - which strips out variables such as fuel and therefore gives a better reading of true underlying price pressures - read at 1.7%, ahead of expectations for 1.6%.

June inflation data

UK CPIH - which is a measure of inflation that includes housing costs - read at 2.0%, beating analyst expectations for a reading of 1.9%. The housing index shows that house prices have increased by 1.4% annually and 0.7% month on month. Although the annual rate of growth is still below the level register this time last year, both mortgage approvals and transactions are up.

“Despite being brought to its knees in recent months as a result of wider economic and political influences, the market certainly seems to have dusted itself off and while current price growth is nothing to write home about, it is there or thereabouts for this time of year and continues to register positive movement," says Colby Short at GetAgent.com.

PPI (output) - which measures price pressures faced by production industries - read at 1.8%, where markets were expecting a reading of 1.7%. PPI often signals future trends in the headline CPI inflation reading.

The data is unlikely to bother the Bank of England at tomorrow's meeting and we expect the Bank to maintain guidance that limited interest rate rises are required over the forecast horizon.

"Looking ahead, CPI inflation likely will fall below the 2% target over the coming months, in response to the renewed fall in oil prices to $62 and the impending reduction in electricity and natural gas prices in October. Nonetheless, past movements in producer prices and import prices suggest that both core goods and food inflation have further to rise, perhaps to about 1.0% and 1.5%, respectively, by the autumn. Meanwhile, modestly below-target inflation likely will not persuade the MPC’s to abandon its plans for further increases in interest rates, given the ongoing upward trend in domestically-generated inflation," says Samuel Tombs, UK Economist with Pantheon Macroeconomics.

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