[LONDON] British inflation slowed as expected in May, pulled down by air fares which leapt in April and the correction of a tax data error, although food prices shot up at the fastest rate in more than a year.
Consumer prices rose in annual terms by 3.4 per cent in May, the Office for National Statistics (ONS) said on Wednesday (Jun 18), just as a Reuters poll of economists and the Bank of England had predicted.
Services price inflation – a crucial metric for the BOE – cooled to 4.7 per cent from 5.4 per cent in April, matching the BOE’s forecast for May. The Reuters poll had pointed to a reading of 4.8 per cent.
Earlier this month the ONS said April’s headline consumer price inflation reading of 3.5 per cent had been overstated by 0.1 percentage points due to an error in car tax data from the government.
April’s figures were not amended, but the correct data was used for May’s readings.
Air fares fell sharply after an Easter holiday spike in April’s readings.
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The data are unlikely to shift interest rate expectations among economists and investors, who think the BOE will leave borrowing costs on hold when it announces its June policy decision on Thursday.
Sterling rose slightly against the US dollar after the ONS data release.
Gas, electricity and water prices rose in April alongside higher taxes on employers, causing inflation to leap from 2.6 per cent in March. A rise in oil prices since the start of the Iran-Israel conflict last week could cause inflation to rise again.
Food prices rose by 4.4 per cent in the 12 months to May, the biggest increase in over a year, the ONS said, a blow for low-income households.
Some BOE officials have said they disagree with the central bank’s key assumption reached at its May meeting that the recent climb in inflation will not have longer-running effects on pricing behaviour.
Chief economist Huw Pill said last month the pace of interest rate cuts was too fast given still strong wage pressures on inflation, but his vote in May to keep borrowing costs on hold was likely to be “a skip” not a halt to rate cuts.
Market pricing on Tuesday pointed to an 87 per cent chance that the BOE will leave rates on hold this week, with two 0.25 percentage-point cuts priced in by the year’s end.
The BOE lowered rates by a quarter point to 4.25 per cent on May 8 in a three-way split vote, with two Monetary Policy Committee members favouring a bigger cut and two – including Pill – favouring a hold.
The central bank said in May it expects inflation to peak at about 3.7 per cent later this year. Some economists think April might prove to be the high point, although the conflict in the Middle East poses a risk of stronger price pressures. REUTERS
