UK inflation rate hits Bank of England target: Will Carney raise rates?
The UK’s Consumer Prices Index (CPI) inflation rate fell to two per cent in May, in line with the Bank of England’s target, the latest figures show.
CPI inflation dropped to within the target range set by Bank boss Mark Carney from 2.1 per cent in April, the Office for National Statistics (ONS) said today.
Falling air fares, a drop in car prices and the late arrival of Easter all pushed the Consumer Prices Index (CPI) down, the ONS said.
Rising prices for games, toys and furniture partly offset the fall, however.
Underlying UK inflation still rose in the year to May
But the National Institute of Economic and Social Research (NIESR) warned that the CPI’s drop was down to extreme price movements.
The underlying rate of inflation, excluding the most extreme price movements, actually climbed 0.3 percentage points to 0.8 per cent.
Jason Lennard, NIESR senior economist, said: “Our analysis … suggests that the fall is due to a small number of large price changes, such as air fares.
“Our measure of underlying inflation, which excludes extreme price movements, picked up by 0.3 percentage points at the national level.
“Underlying inflation also increased in every region of the United Kingdom, rising most in the west Midlands, the North and London.”
Will Mark Carney raise interest rates as UK inflation stays stable?
However, analysts said it was unlikely the latest inflation rate will lead to an interest rate rise.
“Due to the ongoing Brexit uncertainty it is unlikely that governor Carney follows the European Central Bank or the expected move from the Fed in delivering a dovish turn,” said David Cheetham, chief market analyst at trader XTB.
Tom Stevenson, investment director for Personal Investing at Fidelity, added that there is “no pressure” to hike rates.
“The prospect of low rates for the foreseeable future, together with last week’s above-inflation increase in average earnings, means UK households should be feeling more relaxed about their financial prospects than for some time,” he said.
“In the thick of a leadership contest – and with Brexit as far from resolution as ever – the Bank will most likely err on the side of caution as we face continuing political and economic uncertainty during the rest of 2019.”
But Phil Smeaton, chief investment officer at Sanlam, warned the Bank must raise rates if inflation pushes upwards again.
“While inflation remains stable the Bank of England will stay on the side-lines, but if it ticks back up, Carney may be forced to intervene,” he said.
“While the strong performance of the UK economy suggests that an interest rate rise could be sustained if it’s deemed necessary, the lack of clarity on Brexit dramatically increases the risks of such a move.”