UK inflation: Falling a touch

Consumer Price Inflation (CPI) fell to 3.4% year-on-year in May after 3.5% year-on-year in April. That was slightly above consensus expectations of 3.3% year-on-year but in line with the Bank of England (BoE) staff forecast from last month.

Core CPI fell to 3.5% year-on-year after 3.8% year-on-year – which was in line with expectations. Services inflation fell a touch more than expected to 4.7% year-on-year after 5.4% year-on-year, again though that was in line with the BoE staff forecast. Retail price Index (RPI) inflation fell to 4.3% year-on-year from 4.5% year-on-year (a tenth higher than expected).

Inflation was expected to fall a bit, partly because it rose so much last month (from 2.6% to 3.5%, driven by increases in bills). Not all the things that drove inflation higher last month were going to linger with Easter timing effects driving some of April’s increase (notably, air fares which went on to fall in May). Lower petrol prices helped a little in May too. Vehicle excise duty also played a role: the Office for national Statistics (ONS) had already said that inflation should have been a tenth lower last month (reflecting an error in vehicle excise duty data). This was then reflected in the May price index level. Food prices were the biggest offset, pushing up on inflation this month. 

What next? On my forecasts, UK inflation bumps around and above 3% over the rest of this year, partly as energy inflation bumps up and down and with some growing upside risk given events in the Middle East.

I am expecting underlying domestically driven inflation to cool and leave us on track for moving much closer to the BoE’s 2% inflation target next year.

Under the surface though, I am expecting underlying domestically driven inflation to cool and leave us on track for moving much closer to the BoE’s 2% inflation target next year. The UK labour market is slowing and forward-looking indicators suggest that wage growth will cool from here. That should help reduce future inflation pressure.

The impact of tariffs on the UK seems likely to be disinflationary rather than inflationary in my view (though small in scale): it isn’t the UK that has ramped up tariffs. Tariffs are likely to dampen global growth, tariffs can cause trade re-direction, and we may see Chinese producers try to deepen their non-US market share through discounting.  

Bank of England still “gradual and careful”:  These numbers were in line with the BoE staff forecasts from the May Monetary Policy Report. I am expecting today’s data to keep them on track to continue their gradual rate cutting path, with the next rate cut in August.

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