Oil prices have risen. A lower pound is making imports dearer. The more generous minimum wage is pushing up the cost of hiring labour. Signs of inflationary pressure can be seen everywhere apart from in the official measure of the cost of living.
As usual, the City was expecting the headline annual inflation rate to rise in May. As usual, it was wrong. Instead of rising to 0.4%, inflation remained at 0.3%, where it has been in each month of 2015 apart from March, which was affected by the early timing of Easter.
Core inflation, which strips out energy, food, alcohol and tobacco, has been showing the same, steady pattern. It has been stuck at 1.2% in every month of 2016 apart from March, when it spiked to 1.5%.
The breakdown of the data from the Office for National Statistics does suggest that there is some inflationary pressure bubbling away beneath the surface. Prices in the restaurants and hotels sector were 2.6% higher in May than they were a year earlier, up from 2.3% in April. That suggests that employers are passing on the impact of the higher minimum wage to their customers.
Likewise, the rebound in oil prices from a low of under $30 a barrel at the turn of the year to $50 a barrel is starting to feed through into higher petrol and diesel prices.
But these increases are being offset by price cuts elsewhere. High street clothing and footwear chains have been offering mid-season bargains and supermarkets have been cutting the cost of food.
Inflation is likely to edge up during the second half of 2016 as the impact of last autumn’s fall in oil prices fades. As time goes by, the recent weakness of sterling will also have a more marked effect on the cost of imports.
For the Bank of England, lower than expected inflation is a double bonus. On the one hand, it increases the spending power of households and so boosts growth. On the other, it provides greater wriggle room before the government’s 2% inflation target comes under serious threat. With the referendum making the outlook so uncertain, the extra leeway will be extremely welcome in Threadneedle Street.
