Experts tip inflation to return

Press Association
Stacks of coins on graph paper background with red arrow.
Stacks of coins on graph paper background with red arrow.

Inflation is expected to have returned to the UK last month with official figures due this week thought likely to show the end of a brief period of falling prices.

The Consumer Price Index (CPI) measure of inflation fell to minus 0.1% in April, the first time it has turned negative in more than 50 years.

But figures for May to be published by the Office for National Statistics (ONS) on Tuesday are expected to show that it turned positive again, with some experts estimating it will rise to 0.1%.

It would mean CPI is still close to record lows but would be the first time that it has turned higher since October last year.

Inflation was running at 1.5% in May last year and has been on a broadly downward trend since reaching 2.9% in June 2013. It fell to zero in February and March this year before turning negative in April.

Prices have been held down by the supermarket price war and the lower cost of petrol amid a plunge in the world oil price.

But the Bank of England has said it expects CPI to pick up "notably" towards the end of this year as the effect of lower oil and food prices fades.

Low inflation is good for consumers because it means their household income goes further than if inflation were higher.

Yet a return to positive CPI will be welcomed as it will allay fears the economy could sink into a damaging spiral of falling prices - delaying spending and investment and making the real cost of fixed-repayment debts such as mortgages more expensive.

The pace of CPI growth will be carefully monitored by Bank of England policy makers as they consider the optimum time to lift interest rates from their historic low of 0.5%, where they have been for more than six years since the depths of the recession.

Inflation remains well below the 2% level targeted by the Bank, but the nine members of the rate-setting Monetary Policy Committee (MPC) must consider how interest rate policy will affect its path over the next couple of years.

Two MPC members last month indicated they were on the point of voting for a hike - with the decision about whether to do so "finely balanced" - though the committee ultimately voted unanimously to leave rates on hold.

Details of the vote this month - when rates again stayed the same - are due to be published on Wednesday, the day after the inflation figures.

The Bank has hinted at a first rate rise in mid-2016.

Howard Archer, chief UK and European economist at IHS Global Insight, said inflation is likely to have turned to a positive 0.1% in May partly due to a rise in petrol prices.

He also pointed to the one-off effect of air and sea fares having skewed inflation in April, a result of the timing of Easter.

"Consumer price inflation is likely to hover close to zero through the summer and then start heading up from the autumn," he added.

Consultancy Capital Economics is pencilling in CPI of 0.3% for last month.

Vicky Redwood, its chief UK economist, said: "May's inflation figures should show that deflation in the UK lasted for just a month. Admittedly, this would not mean that the risk of a prolonged period of low inflation has suddenly disappeared.

"However, we still think that the chances of this are quite low."

Sainsbury's Suffers from Food Price War
Sainsbury's Suffers from Food Price War