UK inflation rate fell to lowest level in five years last month

Inflation fell to its lowest level in five years this May, coming in at just 1.5 per cent, despite the continued strength of the economic recovery.

A 3.2 per cent drop in air fares between April and May, driven by a spike around the Easter school holidays, helped to trim CPI to its slowest growth since October 2009.

UK prices rose at a slower pace than in April, when they climbed by 1.8 per cent. The figure from the Office for National Statistics (ONS) marks the fifth consecutive month in which the consumer price index (CPI) has registered below-target growth, after years above the Bank of England’s two per cent aim.

The price of food and non-alcoholic drinks dropped by 0.6 per cent from the same month in 2013, the biggest downward change in the index in nine years, and the first time the sub-index has been in negative territory since 2006.

“The ongoing weakness will is likely to complicate the Bank of England's communication on the timing and pace of monetary policy normalisation. We expect inflation to be close to, but below, the two per cent Bank target in 2014 and 2015,” said an analyst at Barclays.

The Bank is now cutting its forecast for the rest of the year, based on the unexpected year-on-year drop in food prices. In 2014, it suggests inflation will now come in at 1.6 per cent rather than the 1.7 per cent expected.

In 2015, Barclays analysts added that inflation is likely to be 1.7 per cent, down from the 1.9 per cent previously forecast.

Late last week, Bank of England governor Mark Carney suggested a rate hike could come sooner than markets expected, but some analysts said that such low inflation readings cast doubt on the timing of the likely increase.

The retail prices index (RPI), which is no longer considered a national statistic, also dipped last month. Retail prices rose 1.7 per cent from May 2013, as opposed to the 1.8 per cent jump seen in April.

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