Inflation Set To Start Rising Again


Britain's dip into negative inflation is set to have lasted just a month, with official figures published today expected to show it turned positive again in May.

The Consumer Price Index (CPI) measure of inflation fell to minus 0.1% in April, the first time it has fallen below zero since 1960.

Figures for May to be published by the Office for National Statistics (ONS) are forecast to show a positive reading of 0.1% - still very low but the first time it will have turned higher since last October.

Vicky Redwood, chief UK economist at Capital Economics, said: "May's inflation figures should show that deflation in the UK lasted for just a month.

"Admittedly, this would not mean that the risk of a prolonged period of low inflation has suddenly disappeared.

"However, we still think that the chances of this are quite low."

Prices have been held down by the supermarket price war and the lower cost of petrol amid a plunge in the world oil price.

But the Bank of England has said it expects CPI to pick up "notably" towards the end of this year as these effects fade.

Low inflation is good for consumers because it means wage rises are worth more in real terms.

A new report from the Resolution Foundation predicts that official employment data - published by the ONS a day after the inflation figures - will show real wages growing at their fastest rate for eight years.

But despite this positive effect of low inflation, a return to price rises will be welcomed by policy-makers.

That is because it will allay fears that the economy could sink into a damaging spiral of falling prices - delaying spending and investment and making the real cost of repayments on debts such as mortgages more expensive.

The pace of inflation's rise will be carefully monitored by Bank of England policy-makers as they consider the optimum time to lift interest rates from 0.5%, where they have been for more than six years since the depths of the recession.

CPI remains well below the 2% level targeted by the Bank, but the nine members of the rate-setting monetary policy committee (MPC) must consider how interest rate policy will affect its path over the next couple of years.

Two MPC members indicatedlast month they were on the point of voting for a hike - with the decision about whether to do so "finely balanced'" - though the committee ultimately voted unanimously to leave rates on hold.

Details of the vote this month, when rates again stayed the same, are due to be published on Wednesday.

The Bank has hinted at a first rate rise in mid-2016.

Howard Archer, chief UK and European economist at IHS Global Insight, said inflation is likely to have turned to a positive 0.1% in May, partly due to a rise in petrol prices.

He also pointed to the one-off effect of air and sea fares skewing inflation in April, a result of the timing of Easter.

"Consumer price inflation is likely to hover close to zero through the summer and then start heading up from the autumn," he said.

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