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Rising transport costs push up UK inflation back into positive territory

After a brief flirtation with deflation in April, UK inflation edged back up to positive territory, with the CPI rate rising to 0.1% year-on-year in May. The figure was within estimates and up from -0.1% in April. Month-on-month, CPI rose by 0.2% as expected.

A rebound in the price of fuel contributed to rising prices as they were higher by 1.9% on the month, with overall transport costs rising by 0.6% in May. But electricity and gas prices continued to fall, declining by 0.3%. Passenger fares for air travel also picked up, rising by 10.4% on the month, having dropped in April due to the timing of Easter. Food prices reversed four months of falling costs as they rose by 0.1% on the month.

The main surprise in today’s figures came from core CPI, which excludes food and energy, as it increased by less than expected, rising by 0.9% year-on-year, versus estimates of 1.0%. But it was still up on April’s figure of 0.8%. Producer prices were also on the weaker side, with input prices dropping by -0.9% on the month, against forecasts of a 0.6% rise, while output prices came in within estimates of 0.1%. House prices continued to ease, with annual prices easing to 5.5% in April from 9.6% in March, the slowest rise since December 2013.

With fuel and food prices showing signs of rebound, CPI is expected to move higher for the rest of the year as forecast by the Bank of England. However, downside pressures remain as the rise in food prices may prove temporary and the pound’s recent strength could limit future price rises.  This would be good news for the Bank of England as any interest rate increases would likely be measured in response. A bigger concern for the Bank of England would be if wages growth started to rise by more than expected as unemployment continues to fall and average earnings excluding bonuses is forecast to hit 2.5% in April when unemployment data is released on Wednesday.

The pound initially fell on the data as some analysts were expecting a stronger pick-up in prices. Cable dropped from a session high of 1.5631 before the data to 1.5544 after the release. However, the pound soon rebounded against both the dollar and the euro, rising to 1.5630 and 0.7186 respectively in mid-European session, with the euro in particular coming under pressure from weak ZEW Economic Sentiment figures for Germany.

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