Recent comments by the Governor of the Bank of England may have added to the confusion over the outlook for monetary policy, but as far as inflation is concerned the picture remains benign, with official data showing subdued price pressures across the economy.
Annual consumer price inflation eased in May to a 55-month low of 1.5%, down from 1.8% in April and below the Bank of England's 2% target for a fifth successive month. The headline CPI rate has followed a gradual downward trend since the middle of last year, despite the period of robust economic activity. We forecast inflation to average 1.7% in 2014.
CPI inflation down to 1.5%(annual rate; %)
Source: Office for National Statistics.
- Lowest CPI inflation rate since October 2009.
- Largest contribution to the fall came from lower air fares, following Easter spike.
- Other downward price effects from food, clothing and footwear.
- Modest upward contributions from higher prices for motor fuels, recreation and culture, and alcohol.
- RPI inflation measure at 2.4% y/y.
- CPIH measure (includes owner-occupiers' housing costs) up 1.4% y/y.
Little evidence of supply chain price pressures
Our latest Pay Bulletin showed a continuation of the broadly stable trend in above-inflation manufacturing wage growth in May. While some business surveys have indicated a recent modest firming of pay pressures in parts of the wider economy, the degree of underlying slack in the labour market is expected to keep overall wage growth in check, prolonging the weak trend in real disposable incomes. The current period of softer emerging market demand and the relative strength of sterling will continue to weigh on global commodity costs, not least energy and food prices, with the latter also dampened by an ongoing price war among the main UK supermarkets.
Output (factory gate) prices edged down slightly on a monthly basis in May, and were up just 0.5% compared with a year earlier. Reflecting the subdued trend in commodity markets, input prices of materials and fuels bought by UK manufacturers for processing declined for a fifth successive month in May, and were down 5% compared with a year earlier. This may not be sustained in June, however, given rising uncertainty over developments in Ukraine and Iraq, which could push up near-term energy prices.