UK dodges second month of deflation

The UK has risen out of deflation as the Consumer Prices Index rose by 0.1 per cent in May, after one-month of negative inflation in April.

The year to May saw a rise in prices compared to the 0.1 per cent fall in the year to April, with petrol prices being blamed for the bulk of the drop in prices.

May saw a significant rise in transport costs, food and motor fuel prices, pushing the figure up.

However, core inflation was only 0.9 per cent, after hitting a low of 0.8 per cent in April, which gives some cause for concern.

“We doubt that deflation will recur in the UK, although it cannot be completely ruled out if oil prices take a renewed appreciable downward lurch,” says Howard Archer, chief UK and Europe economist at IHS Global Insight.

“We believe it is most likely that consumer price inflation will hover just above zero through the summer and then start heading decisively up from the autumn. This should be the consequence of base effects becoming less favorable, firmer oil prices overall, earnings growth picking up, and excess capacity in the economy diminishing,” he adds.

However, investors should still be wary of the figures, says Kevin Doran, CIO at Brown Shipley.

“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,” he says.