Latest UK inflation data – May 2016

UPDATE: Listen to Pete Comley talk about the latest inflation data on Share Radio:

The latest inflation data published today shows no change in CPI (0.3%) but a slight rise in RPI to 1.4% (from 1.3%). Bar the quirky March figures which were distorted by Easter, CPI has been stuck around 0.3% in 2016.

This latest month saw rises in transport costs (diesel), hotels, insurance and telecoms prices balanced by declines in food ones, clothes and computer games. The supermarket price war continues with new lows for the prices of pork, sausages, chicken, as well as certain vegetables such as potatoes, broccoli and carrots. Overall goods prices have declined -1.8% over the last year whilst services have risen 2.6%.

The low inflation psyche

The Producer Prices Index is -0.7% confirming that cost of goods produced continues to decline, despite the recent falls in the value of Sterling (down almost 20% since the high about two years ago). This says something about the lower commodity prices but also something about the psyche of a number of British businesses that are reticent to raise prices in this apparently low inflation world. Many are therefore seeking to contain costs and keep prices stable.

There are however businesses – especially in certain service areas – that feel they have enough power to raise prices. For example, you can see this in: hotels (+4.7%), insurance (+8.8%), recreation/cultural events (+4.2%), telecoms (+2.9%), and domestic/household services (+3.7%) to name just a few sectors.

Future inflation and Brexit

With the continued depressed world demand due to the overhang from the financial crisis, a reasonable scenario is probably one of continued low inflation. That being said, it is important to remember that should oil prices be maintained (or rise) there will come a point this autumn when rising petrol prices start adding positively to CPI and we will see it edge up towards 1%.

The now more likely prospect of Brexit could also add to inflationary pressures. If the polls are correct and we vote to leave on 23 June, many think that the pound could decline significantly. Although exchange rate changes take a time to feed through to inflation, they usually do and sometimes in a strong way, so CPI above 2% in 2017 is now probably more likely.

Longer term though, the implications of Brexit on inflation are much more difficult to predict and a return to lower inflation levels is possible. The Euro itself may well come under pressure, especially if referendum votes are called in other countries such as France, Netherland and Czech Republic. The pound may then recover as a paradoxical safe haven from a potentially crumbling European empire. In addition, some seem to think that Brexit could cause the housing market to decline – again a deflationary pressure – especially on RPI which factors in house prices more directly.

The latest set of ONS data can be found here.

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