Inflation set to stay below target

Tuesday 17 June 2014

Inflation should remain at or below the Bank of England's 2% target for a sixth month in a row when official figures for May are published today.

The Consumer Prices Index (CPI) measure of inflation is predicted to have slipped to 1.7% after rising to 1.8% in April.

Higher transport prices due to the timing of Easter drove prices higher that month but the rate is predicted to have resumed a downward trend that started last summer. It will be the first time the economy has seen six successive months of at-or-below target inflation since November 2009.

The figures come days after Bank of England governor Mark Carney signalled that the first hike in interest rates could come sooner than expected, prompting a number of forecasters to bring forward expectations for a rise to this autumn. Continued low inflation appears to ease any pressure on the Bank to lift rates but Mr Carney pointed to growth being much stronger and unemployment falling much more quickly than had been expected.

Policy makers must consider inflationary pressures that could be building up down the track and whether it is sensible to leave so-called "emergency" monetary policy in place with the economic picture looking healthier. He indicated in his Mansion House speech that "gradual and limited" interest rate rises were "coming nearer".

The expected small drop in inflation for May will bring little comfort to workers squeezed by falling real terms pay, with latest labour market figures showing wage growth had slowed to 0.7% - though this was partly attributed to a bonuses blip.

Investec economist Victoria Clarke said air and sea fares for the month were expected to have dropped back from their Easter highs, though petrol was expected to apply some upward pressure.

She said a fall to 1.7% would help to "reassure that current price trends are well contained, despite the building economic recovery".

Alan Clarke of Scotiabank pointed to the downward effect on food inflation from the latest phase in the supermarket price war.