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.

MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

What the commentators said

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".