Economists predict return of inflation

Bank of England governor Mark Carney (Picture: Anthony Devlin/PA Wire)
Bank of England governor Mark Carney (Picture: Anthony Devlin/PA Wire)
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Inflation is expected to have returned to the UK last month, bringing to an end a brief period of falling prices.

The Consumer Price Index (CPI) measure of inflation fell to minus 0.1 per cent in April, the first time it has turned negative in more than 50 years.

But figures for May, which are set to be published by the Office for National Statistics (ONS) on Tuesday, are expected to show that it turned positive again.

Some experts have estimated it will rise to 0.1 per cent.

This would mean CPI is still close to record lows but would be the first time that it has turned higher since October last year.

Inflation was running at 1.5 per cent in May last year and has been on a broadly downward trend since reaching 2.9 per cent in June 2013.

It fell to zero in February and March this year before turning negative in April.

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

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

He also pointed to the one-off effect of air and sea fares having skewed 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 added.

Consultancy Capital Economics is pencilling in CPI of 0.3 per cent for last month.

Vicky Redwood, its chief UK economist, 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.”

The Bank of England has said it expects CPI to pick up “notably” towards the end of this year as the effect of lower oil and food prices fades.

In February, BoE governor Mark Carney predicted inflation would likely turn negative at some point in the spring.

That month, Monetary Policy Committee member Kristin Forbes told The Yorkshire Post inflation would rise within the year, as wage increases feed through to the wider economy.

While consumers benefit from low inflation as household income stretches further, a return to positive CPI will be welcomed as it will allay fears the economy could sink into a damaging spiral of falling prices.

Continued deflation can delay spending and investment and make the real cost of fixed-repayment debts such as mortgages more expensive.

The pace of CPI growth will be carefully monitored by BoE policy makers as they consider the optimum time to lift interest rates from their historic low of 0.5 per cent, where they have been for more than six years.

Inflation remains well below the two per cent 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 last month indicated 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 day after the inflation figures.

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