Fears that the UK may be heading for a period of prolonged deflation have eased as inflation returned, to 0.1%, in May from a contraction of 0.1% in April.
UK moves out of deflation
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Fears that the UK may be heading for a period of prolonged deflation have eased as inflation returned, to 0.1%, in May from a contraction of 0.1% in April. The consumer prices index (CPI), which measures the rate of inflation in the UK, rose by two percentage points in May compared to April, dragging prices back into positive territory after a spell of disinflation that was largely blamed on falling energy and food prices. Reversing this trend, the largest upward contributions to inflation in May came from transport and food and non-alcoholic beverages. Overall, transport rose 0.6% between April and May 2015, compared with a fall of 0.7% a year earlier. Air fares played a large role in increasing transport prices due to the timing of Easter, which meant that fares rose between April and May, having fallen a year ago. The price of petrol also increased, rising by 2.5 pence per litre between April and May, while diesel rose by 1.5 pence per litre. Contributors The price of food and non-alcoholic beverages did in fact fall in May; however, the decline of 0.1% was less than a fall of 1.1% between April and May 2014, leading to an effective gain on the 12-month rate. The largest downward contribution to CPI in May came from recreation and culture, as prices fell by 0.1% compared with a rise of 0.4% during the same period last year. The biggest price falls were seen in games, toys and hobbies (notably computer games). There was a smaller downward contribution from alcoholic beverages and tobacco, particularly wine, with overall prices falling by 0.04% between April and May. While inflation is no longer contracting, many have warned against over-enthusiasm as prices continue to remain suppressed throughout the UK economy. Kathleen Brooks, research director at forex.com, says: 'Although the UK's dalliance with deflation was shortlived, we are not out of the woods yet. Producer prices, which are a good indication of pressure in the UK's inflation pipeline, remain mired in deflationary territory. "Input prices fell 0.9% in May, while the market had been looking for a rise of 0.6%. This pushed the annual rate down to -12%, erasing a recent attempt at recovery." Core inflation Ben Brettell, senior economist at Hargreaves Lansdown, also observes that core inflation - which strips out cyclical factors such as energy and food - rose by just 0.9% in May, undershooting analysts' forecasts by 0.1%. "Core inflation shows that, even accounting for the dramatic fall and partial rebound of the oil price, inflationary pressures in the economy remain weak. Consequently there is still little pressure on policymakers to raise interest rates in the short term, with the first rise pencilled in for the first half of next year at the earliest," says Brettell. Others, however, take a contrary view. These include Kevin Doran, chief investment officer at Brown Shipley, who believes that official figures do not accurately reflect the state of inflation in the UK. "If you look in the right places it's perfectly clear that there is an abundance of inflation, particularly in asset prices, with talk of bubbles in house, bond and equity markets not farfetched," he says. "With inflation rebounding out of negative territory, we could now see a steady rise as asset price inflation filters across and into real world inflation. Importantly however, I haven't seen markets pricing a further rise and its potential risks correctly. I for one am avoiding fixed income, in part because of naïve inflation projections." This article was written for our sister website Money Observer
Source Moneywise http://ift.tt/1JRDFgT
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