UK inflation retreats from a record high

FALLING food and petrol prices dampened inflationary pressures last month and caused the consumer prices index (CPI) to retreat from its 17-month April high to an annual rate of 3.4 per cent in May.

The Office for National Statistics (ONS) said that the largest downward contribution to the change in the CPI annual rate came from food and non-alcoholic beverages. A further large downward contribution came from transport, where prices of fuels and lubricants rose by 0.3 per cent between April and May this year compared with a rise of 2.4 per cent a year ago.

The broader retail prices index (RPI) also eased slightly to an annual 5.1 per cent from April’s 19-year high of 5.3 per cent. However, this still overshot the consensus estimates of five per cent inflation. The RPIX, which strips out housing costs from the RPI, rose by 5.1 per cent, down from 5.4 per cent in April. The fall in core goods inflation, which excludes energy and food prices, was welcomed since it suggests that the upward effect of rising import prices is starting to reverse.

Although the headline inflation figure of 3.4 per cent was marginally less than the consensus had estimated, economists are still concerned about the stickiness of inflation. Barclays Capital’s Simon Hayes said he did not expect CPI inflation to dip below three per cent until December – this is a more persistent inflation profile than that expected by the Bank of England.

Henderson’s Simon Hayes expects CPI inflation to rebound in 2011, based on a firming of core price trends as the recovery develops and an assumed rise in the standard VAT rate to 20 per cent next January.