Headline UK inflation still above target

BRITISH headline inflation fell by much less than had been expected in May, raising speculation that the Bank of England’s Monetary Policy Committee (MPC) may decide not to extend its quantitative easing programme beyond the current £125bn. 
 

Official data yesterday showed that consumer prices rose 0.6 per cent last month, taking the annual rate of consumer price inflation (CPI) to 2.2 per cent in May compared to 2.3 per cent in April, above analysts’ forecasts of two per cent and above the Bank’s two per cent target.
 

The decline in the annual CPI rate reflected falling food inflation and lower electricity prices, while upward pressures came from tax rises on alcohol and tobacco as well as from rising prices of DVDs and televisions. 
 

Consumer prices have remained sticky in Britain because of the sharp boost to import prices from the weak pound. Jonathan Loynes at Capital Economics said: “The full price effects of the sharp slowdown in the economy over the last year have yet to be felt. Core inflation will drop sharply in response to the large degree of slack already evident.”
 

But George Buckley at Deutsche Bank said: “Given the upside surprises in much of the economic news the MPC may decide not to sanction the additional £25bn of asset purchases available to it under the current agreement, but rather complete its programme of £125bn of asset purchases at the end of next month.” 
 

The retail prices index (RPI), which is typically used in wage agreements and includes mortgage payments, was -1.1 per cent in May compared to a slightly lower -1.2 per cent in the previous month.
 

Eurozone annual inflation was flat in May because of sharply lower energy prices and lower food prices.