Well, that didn’t last long. A month after the cost of living turned negative for the first time in more than half a century, inflation was back.
In truth, there is little difference between the fact that prices on the government’s preferred measure fell by 0.1% in the year to April and that they rose by 0.1% in the 12 months ending in May. Inflationary pressure remains weak and is likely to remain so.
Evidence for that comes three sources. Firstly, core inflation – which strips out volatile items such as energy and food – is low. There was a small rise from 0.8% to 0.9% in May, but that was due to the timing of Easter, which had an impact on the cost of air travel.
Secondly, there is no inflation coming down the pipeline from manufacturers. Each month, the Office for National Statistics publishes a producer prices index alongside its consumer prices index in order to measure how much industry is paying for its fuel and raw materials and how much it is charging for goods leaving factories. In the year to May, manufacturers’ fuel and raw material costs were 12% down on a year earlier, and the prices they were charging customers were down by 1.6%.
Thirdly, consumers have yet to feel the full benefit of last year’s drop in oil prices in their domestic energy bills. Some of the tariff reductions from the suppliers have come through but not all of them. With the cold start to the summer likely to encourage aggressive discounting by clothing and footwear retailers, there is a risk that inflation could go negative again over the next couple of months, before rising in the second half of the year as a result of last year’s oil price falls not being repeated.
But there is nothing in the CPI data to get the Bank of England unduly alarmed. What would concern the nine members of Threadneedle Street’s monetary policy committee would be evidence of a marked increase in wage inflation. At present, there’s not much sign of that either.
