U.K. Inflation Decreases Slightly Below Anticipated Levels in May
LOOKY HERE: London's inflation rate took a surprise dip in May, staying put at 3.4% instead of the predicted 3.3% drop, according to official data released Wednesday. This unexpected stability has forecasters grumbling and the Bank of England (BoE) scratching their heads as they prepare to make a call on interest rates this week.
The Consumer Prices Index saw a slight drop from 3.5% in April, as reported by the Office for National Statistics (ONS). Analysts had earlier anticipated a more significant decrease.
Despite predictions of a hike in April due to skyrocketing utility bills, the BoE is expected to keep its key interest rate at 4.25% during their decision on Thursday. The unusual equilibrium in inflation can be attributed to several counterbalancing factors:
- Core inflation, which leaves out volatile items like food and energy, remained consistent, reaching 3.5% in May, only slightly down from the 3.8% in April[1].
- The seemingly stable April inflation figure of 3.5% was artificially inflated due to a government data error. Unfortunately, the Office for National Statistics did not correct this error officially, making it appear as if the inflation rate has remained steady rather than declined[1].
- Inflation affects a wide range of goods and services, including housing, electricity, and transportation. With the increase in vehicle excise duty, airfares, gas, electricity, and water supply costs in April, there has been a consistent push in prices[2].
The persistence of inflation above the Bank of England's target and the Eurozone rate indicates ongoing price pressures.
Given the sustained inflation, the BoE may be less inclined to ease up on interest rates or even consider a rate hike to manage escalating cost levels. "Inflation has remained remarkably persistent and is notably above the target rate," suggests senior economist Dave Jones[3].
In conclusion, the stable inflation in May—driven by sustained core price pressures and rising costs in key areas like housing and utilities—suggests that the BoE will proceed cautiously and could maintain or even increase interest rates to meet its inflation target.
[1] https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflationstatisticsuk/april2023[2] HM Revenue & Customs (2023). Vehicle excise duty. UK Government. Retrieved from https://www.gov.uk/vehicle-tax-rates/current-rates[3] Jones, D. (2023). UK Inflation Impact on Interest Rates. Economical Intelligence. Retrieved from https://www.economicalintelligence.com/uk-inflation-impact-on-interest-rates/
- The unexpected stability of London's inflation rate has raised questions for forecasters and the Bank of England, with experts suggesting that the rate may influence their decision on interest rates.
- The Consumer Prices Index (CPI) saw a minor drop in May, despite earlier predictions of a more significant decrease, with core inflation remaining consistent.
- Inflation, influenced by numerous factors such as housing, electricity, and transportation, has persisted above the Bank of England's target and the Eurozone rate, causing ongoing price pressures.
- Given the sustained inflation and rising costs in key areas like housing and utilities, the Bank of England might proceed cautiously and consider maintaining or increasing interest rates to meet its inflation target.
