Inflation expected to cool off as travel boost unwinds

Inflation is expected to have slipped in May, following an Easter boost to transport prices in the previous month.

Consensus estimates predict Office for National Statistics (ONS) figures will reveal on Wednesday that the Consumer Prices Index (CPI) rate of inflation was down to 2.0% last month.

This compares with 2.1% in April, and would put the measure dead on the Bank of England’s target just one day before the next interest rates decision.

Unwinding in the cost of transport will be one of the most significant factors in last month’s dip, after the prices of air fares, rail, coach, and sea travel all jumped higher in April.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “April’s rate was boosted because Easter occurred much later and closer to Index Day than in April 2018.”

He predicted that transport services inflation will fall back to 3.5% in May, compared with 10.4% in April, reducing the sector’s contribution to the overall rate.

Downward pressure is also expected to come from energy prices, after a small rise in motor fuel costs in May compared with the same time last year.

Tobacco is also set to show a smaller increase than in May 2018.

However, food inflation is expected to be higher as producer and import prices rose.

The latest figures will prompt fresh speculation over whether the Bank of England’s Monetary Policy Committee (MPC) will raise interest rates this year.

The Bank’s chief economist, Andy Haldane, has said he believes interest rates will need to increase soon to keep inflation in check.

Mr Tombs said the decision-makers are likely to keep a closer eye on underlying services inflation, rather than the headline CPI rate which has been depressed by lower energy prices.

He said: “If, as we expect, ‘underlying’ services inflation remains on its rising path and a further Brexit extension is granted in October, then the Committee likely will raise Bank Rate towards the very end of this year.”