Deflation didn't last long... after just one month, prices are growing

Rising fuel costs and air fares swiftly snub out first dip in 55 years

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The Independent Online

The UK’s first dip into deflation in 55 years ended after a single month in May as rising petrol prices and air fares helped push the cost of living back into positive territory, official figures showed.

The official consumer prices index, which measures the cost of an average basket of goods and services, dropped to minus 0.1 per cent in April, indicating prices falling year on year for the first time since March 1960.

But May’s figures showed prices growing again – albeit by a marginal 0.1 per cent on last year – driven by an average 2.5p a litre rise in petrol prices at the pumps. Air fares also bounced back in May after this year’s earlier Easter meant traditional higher holiday season fares were not picked up in April’s figures. Food prices also dropped less sharply than last year, adding to inflationary effects.

Although inflation has turned positive again, it remains well below the Bank of England’s 2 per cent target and is forecast to stay at low levels for another two years.

But the Bank’s Governor, Mark Carney, insists inflation is likely to pick up as the effect of last year’s plunge in global oil prices fades, and says the UK is not heading into genuine deflation – defined as widespread and sustained falls in prices, as seen in Japan in recent years.

Investec’s chief economist, Philip Shaw, said: “The real question is whether Britain is beginning to depart a phase of ‘lowflation’. This will take some time to assess, which will not only involve appraising the next few months of CPI figures, but also supporting evidence such as trends in pay growth as well.”

For now, UK households are enjoying real pay rises as average wages grew by 2.2 per cent in the first quarter of the year, well ahead of the rise in the cost of living. Figures due today are set to show basic earnings rising at an even stronger annual pace, of 2.5 per cent in the three months to April. “The growth in real wages is now stronger that it has been since the end of 2007,” according to CEBR economist Nina Skero.

This may test the nerves of Monetary Policy Committee hawks such as Martin Weale and Ian McCafferty, who were voting for an interest rate rise until early this year when inflation plunged. Elizabeth Martins, an economist at HSBC, said: “We still think the MPC’s hawks will look beyond these very low numbers in the near term as they seek to target inflation over the medium term, and begin voting to raise rates over the next few months.”

The Office for National Statistics’ measure of “core” inflation, which strips out rises in energy, food, alcohol and tobacco, rose by an annual 0.9 per cent in May, edging up from April but still well below the Bank’s target. That puts little urgency on the MPC to push for prompt rate rises unless wage growth takes off.

Ross Walker, senior UK economist at Royal Bank of Scotland, said: “With domestic wage inflation still subdued and a relatively benign external inflation environment, there is no immediate pressure on the MPC to raise Bank Rate. The RBS forecast remains for the first rise to come in February 2016.”