Latest UK inflation data – May 2015

The latest CPI inflation shows deflation of -0.1%. This is the first time there has been any recorded deflation since 1960 (note CPI only goes back to 1996, but ONS have projected it back to 1960). The main reason for the apparent decline says more about price changes a year ago than it does about recent ones.

In fact the latest month-on-month change since March 2015 is an increase in prices by 0.2%. Anyone who has bought petrol or shopped in a supermarket will have noticed the gradual rises e.g. petrol was 114p in April vs 112p in March (and just 108p in February).

In particular what has fallen out of the stats this month are some apparent rises seen in airfares. I say “apparent” as ONS collect that type of data at a fixed time each month and last year it was over Easter, when prices rose. Easter was earlier this year (6th vs 20th April), so the headline decline in prices is probably largely a methodological quirk.

Many goods have declined in price over the last 12 months but some are up eg tobacco (+6.4%).  Overall services are still rising at 2% according to CPI. In particular new car sales (+2.4%)  and maintenance (+2.5%) are contributing to continued inflation as is a number of other areas such as recreation and culture (+2.8%), train fares (+2.5%), education costs (+10%), accommodation services (+3.8%).

But remember that CPI excludes virtually costs related to housing. Today the latest data showed UK house prices up nearly 10%. That is partly why RPI (which includes them) is still nearly 1%. See article here for differences between CPI and RPI.

The big picture for inflation is today’s numbers will probably mark their low point. Last May we saw a decline in prices – we are not going to see that this time. Commodity prices are rising again and this will feed through to the stats. I would not be at all surprised to see CPI back to 0.2% or more next month. It will probably be 1% by Christmas and Mark Carney last week said he expected it would be above 2% within 2 years. Enjoy the brief period of deflation whilst it lasts.

The above said, I don’t think we’ll need to wait another 55 years for deflation again. See here for why.

More details on the latest numbers can be found in the full ONS report.