Data released by ONS today shows that CPI inflation has jumped back into positive territory but only just – increasing by 0.1% in the year to May compared to falling by 0.1% in April. The increase in the inflation rate came on the back of easing downward pressures from food and motor fuel prices – the main culprits behind falling prices in the last 12 months. The most notable upward contribution to the inflation rate came from transport services, namely from air fares, likely down to the timing of Eater in April this year.
Producer prices continue to fall
Input prices continued to fall for manufacturers driven once more by home food materials and crude oil. The price of materials and fuels bought by UK manufacturers fell by 12% in the year to May, compared to a fall of 11% in April. Despite the fact that the price of crude oil increased over the month and put upward pressure on the monthly PPI rate, it still represents the key drag over 12 months.
Output price falls eased slightly, falling by 1.6% in the year to May, compared with a 1.7% fall in April. This would suggest some improvements in margins for British manufacturers. Our latest Outlook survey confirms that manufacturers expect some easing on persistently squeezed margins over the next three months.
Is inflation ready for lift-off again?
Monthly indices for both CPI and PPI show that the downward pressure from petroleum and crude oil is easing considerably. The oil price has been creeping up closer to 60$ p/b from its lows in the beginning of the year. However, these price increases are being offset by persisting falls in food and drink prices spurred by the ‘supermarket wars’.
We expect inflation to hover around the 0% mark for a few months more. It is still possible that CPI inflation will turn negative again in June as base effects from postponing clothing discounts to July from June in 2014 – unlikely to be replicated this year – will drag on prices. Sluggish global growth is not helping either pushing down import prices while Europe’s quantitative easing program is partially undermined by heightened uncertainty around Greece.
All in all, inflation should remain low for the rest of 2015. This is good news for household consumption which should continue to drive growth this year. We still do not expect persisting deflation in the UK economy however, with consumer confidence consistently robust, the oil price on the mend and continuous improvements in the domestic labour market. The latest BoE survey seems to confirm this, indicating that inflation expectations for the next 12 months increased to 2.2% in May from the 1.9% low in February.