Official data released by the Office for National Statistics showed on Tuesday that UK's headline and core inflation surprised to the downside in May. The headline CPI held at 0.3 percent y/y while the core inflation rate, excluding food, energy, alcohol and tobacco, rose at a 1.2 percent y/y rate in May, as in April.
The ONS said the main upward pressure on the inflation rate came from transport costs, which rose by 0.9 percent between April and May, partly due to higher diesel costs. However, offsetting this was clothing and footwear prices, which dropped 0.2 percent between April and May, while food and drink prices fell 0.4 percent.
The Bank of England has an inflation target of 2 percent, but has failed to meet this for more than two years. The Bank's most recent forecast, in May, said inflation would remain below 1 percent until late into 2016, and would stay below the 2 percent target until 2018.
That said, early Q2 ‘hard’ data have surprised on the upside. Surveys for May have recovered a little, further limiting the likely downside for activity growth in the second quarter. Official estimates of industrial and construction output for April do not, so far, suggest the likelihood of a further slowdown in the second quarter.
“We continue to anticipate that a moderate recovery in domestic cost pressures, especially via faster pay growth from 2016 H2, will underpin headline inflation’s continued crawl back towards the 2 percent target,” said Lloyds Bank in a report.
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