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UK inflation unexpectedly holds at one-year low despite oil price rise

The BoE said last month it expected inflation to pick up again a bit in the coming months due to higher oil prices and energy bills

Gulf News

LONDON: British inflation unexpectedly stuck at a one-year low last month, though rising oil prices suggest a modest increase could be on its way, leaving the outlook for Bank of England interest rates finely balanced.

Consumer price inflation held at 2.4 per cent in May, its joint-lowest annual rate since March 2017, the Office for National Statistics said on Wednesday, below economists’ forecasts in a Reuters poll of a rise to 2.5 per cent.

Inflation hit a five-year high of 3.1 per cent in November, when the effect of the pound’s tumble after June 2016’s Brexit vote reached its peak.

The BoE said last month it expected inflation to pick up again a bit in the coming months due to higher oil prices and energy bills, before resuming a steady decline towards its 2 per cent target.

Sterling edged up after the data but the odds on a BoE rate hike in the next few months lengthened slightly on signs that any acceleration in inflation would be limited, Scotiabank economist Alan Clarke said.

Other recent economic data has also suggested the BoE is unlikely to see an urgent need to raise rates.

“It’s just not screaming ‘hike, hike, hike’ now,” Clarke said. While inflation might rise to 2.6 or 2.7 per cent in June, it was likely to resume its downward trend from July and be back at the BoE’s target of 2 per cent by the end of the year.

“There’s plenty more downside to come,” he added.

Consumer spending — typically the biggest driver of British economic growth — has been heavily squeezed over the past year by inflation above the BoE’s 2 per cent target.

In another pinch on household budgets, fuel prices rose by the biggest monthly amount since January 2011, up 3.8 per cent.

However, the fuel increase was offset by a drop in the cost of computer games — which is typically volatile — and smaller rises in energy bills than a year earlier.

The BoE raised its key interest rate for the first time since before the 2008 financial crisis in November, but weak first-quarter growth caused it to postpone a rate rise which had been widely expected for May. Now most economists polled by Reuters expect a move in August, though soft April data on wages and industrial output have caused some to have doubts.

Financial markets priced in a roughly 50 per cent chance of an August move after Wednesday’s inflation data, Clarke said.

Other data from the ONS pointed to a sharp rise in short-term upward pressures for consumer prices.

Among manufacturers, the cost of raw materials was 9.2 per cent higher than in May 2017, boosted by a 2.8 per cent increase on the month, the biggest monthly jump since October 2016 and above all forecasts in a Reuters poll.

Crude oil prices are more than 40 per cent higher than last year.

“Inflation may start to drift upwards in the coming months as the recent spike in oil prices filters through supply chains,” said Suren Thiru, an economist at the British Chambers of Commerce.

However, he added that he expected the boost to be short-lived and described the case for an August rate rise as “looking more remote”.

— Reuters

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