The Consumer Prices Index (CPI) rose by 0.3% in the year to May, unchanged from April. Other than a spike in CPI in March, due largely to the timing of Easter, inflation has been at 0.3% for every month so far this year.
Amongst the twelve broad CPI components prices remained very stable. There was a small unwinding of the deflation in transport prices. Movements in the price of diesel and sea fares were the main drivers of the change. Alongside this, there was also a modest uptick in inflation for restaurants and hotels, and communication.
Offsetting this was an easing in inflationary pressures from clothing and footwear, recreation and culture, and food and non-alcoholic beverages. The overall impact of these developments was a slight entrenching of goods deflation from 1.6% in April, to 1.8% May. This was offset by an increase in services inflation from 2.4% to 2.6%. Core inflation, which strips out food and fuel, remained at 1.2%.
Given the absence of any large movements in the latest numbers, our benign baseline forecast for CPI remains largely unchanged. We expect CPI inflation to increase gradually as the oil price recovers and the large falls in the food component of CPI over the past couple of year’s bottom out. Quicker than expected oil price growth, and the potential for an increase in import prices from a further depreciation of sterling against a number of key currencies mean the risks to the forecast are balanced on the upside.