posted by Trader No 1 on Jun 16
Inflation fell in May to its lowest since the beginning of 2008, but remained higher than most economists expected.
The smaller than expected fall in consumer price inflation from 2.3 per cent in April to 2.2 per cent last month, compares to economists’ expectations for a drop to 2 per cent.
However, the retail price index fell by 1.1 per cent in May compared with prices a year ago, the Office for National Statistics reported on Tuesday. The fall was the second consecutive month of annual declines, although slightly less of a drop than the 1.2 per cent fall seen in April.
The CPI has fallen for the last three months and is well below its the recent peak of 5.2 per cent last September, which was brought on by soaring oil prices. It is now at its lowest since January of last year.
Many economists and the Bank of England have put the recent strength of inflation down to the sharp fall in sterling over the course of the financial crisis, driving up the price of imports. UK inflation remains well above that in the rest of the EU and the eurozone.
After the weaker pound worked its way into price levels, the UK economy still has to face the impact of higher unemployment on demand and inflation. The sharp fall in energy and commodity prices since last summer should also mean inflation falls much further by this autumn.
“With unemployment set to soar even higher over the next year, more than containing underlying inflationary pressure in the labour market, sterling may just have postponed the downside inflation risks, rather than killing them off altogether,” said Colin Ellis, economist at Daiwa Securities SMBC.
The Bank’s long term forecast is for inflation to fall below its 2 per cent target for an extended period of time.
Sterling hit rose to its highest level of the year against the euro following the release of the inflation report. The euro fell to £0.8444 against the UK currency, its weakest level since early December. The pound was also stronger against the dollar and the Swiss franc as investors bet the Bank of England would have to raise interest rates from their historically low level of 0.5 per cent earlier than previously thought.
Leave a Reply