UK inflation slumps to post-crisis low

The annual rate of consumer price inflation in the UK fell to 1.5% in May, 0.3 percentage points down on the previous month. It hasn’t been this low since late 2009.

The unexpectedly big drop was due to falling airfares and the first annual decline in food prices since 2006, a result of the price war among supermarkets.

Housing-market inflation is accelerating, however. Figures from the Office for National Statistics revealed a 9.9% increase in the year to April, the fastest year-on-year rate since 2010. London prices are climbing by 18.7%.

What the commentators said

The decline in inflation looks set to continue, said Larry Elliott in The Guardian. The producer prices index, which tracks inflationary pressure in the pipeline, shows that manufacturers’ factory-gate prices are rising by less than 1% a year.

Inflation expectations, a measure of where the public thinks the cost of living is heading, are subdued. Earnings growth is running at under 1% a year.

Meanwhile, sterling has risen to a five-year high against the dollar, and is at similarly lofty levels against a basket of trading partners’ currencies. It’s hard to see where inflationary pressure is going to come from.

It could come from higher oil prices resulting from the Iraq crisis, said The Daily Telegraph. Fears of lower supplies have already boosted oil prices and the crisis could easily spread. The timing of Easter also tempered prices. Alan Clarke of Scotiabank reckoned inflation could rebound to 1.9% by the end of the year.

While the outlook for inflation may not be clear, the Bank of England’s intentions are even less so. As James Mackintosh noted in the FT, the Bank “maintained the easiest monetary policy in its history even as inflation overshot its target every month from 2009 until last November”.

Now that inflation is at a post-Lehman low, it has become more hawkish, as Governor Mark Carney’s speech last week – only a month after he appeared dovish – shows.

Meanwhile, his attitude to the one area of the economy where there is a lot of inflation, the housing market, is also confusing, added Ed Conway in The Times. If he’s so keen on macroprudential tools to cool the market, why the sudden new apparent emphasis on interest rates?

Perhaps, concluded Larry Elliott, Carney is “not quite as smart as he thinks he is and is making it up as he goes along”.

• Stay up to date with MoneyWeek: Follow us on TwitterFacebook and Google+

MoneyWeek magazine

Latest issue:

Magazine cover
What a farce!

John Stepek on surviving the Greek fallout

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues

From ADRs to Z scores – all the terms you wish you understood, but were too embarrassed to ask about.

Gervais Williams: if you want real dividend growth, buy small-cap stocks

Merryn Somerset Webb interviews small-cap stock expert Gervais Williams about how penny shares outperform blue chips 'again and again'.

Which investment platform is the right one for you?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from, with varying fees and charges. Find out which is best for you.

1 July 1972: Britain's first Gay Pride march is held 

On this day in 1972, the Gay Liberation Front organised Britain's first Gay Pride march from Trafalgar Square to Hyde Park.

Anatomy of a Grexit: how Greece would go about leaving the euro

Jonathan Loynes and Jennifer McKeown, economists at Capital Economics, look at the key issues and challenges of a Grexit, how it might be best managed, and set out a timetable for change.