Inflation set to ease slightly before interest rates decision
UK inflation is set to ease slightly to 3.3 per cent in May, according to a poll of economists, in a final set of data to be seen by Bank of England officials before they come to an interest rates decision on Thursday.
A slightly lower rate of inflation would enthuse investors, who currently predict around two further interest rate cuts to be made this year in August and December.
It would also follow a jump in consumer price index (CPI) inflation to 3.4 per cent in the year to April, although the Office for National Statistics (ONS) originally said inflation was 3.5 per cent before an unprecedented revision due to an error in vehicle excise duty figures provided by the government.
The ONS has also said its datasets would not be changed despite the latest error, which comes after a couple difficult years where it has received criticism from Bank of England rate-setters and prompted intervention from the government. Some analysts have called for figures to be published quarterly instead of monthly, to smooth out discrepancies in the data, which has led figures to jump wildly between months.
Analysts at JP Morgan and leading City firms have indicated that high inflation levels in April were due to one-off price changes, such as in water bills and mobile phone data payments.
Economists at JP Morgan also said: “We expect some payback from Easter effects, such that airfares decline and drag on services prices. We also expect food to show a soft sequential gain following a strong April print.
“This leaves us expecting a drop in headline [inflation] to 3.3 per cent year-on-year.”
Inflation predictions vary
A Goldman Sachs preview said services inflation would decline to 3.7 per cent while CPI inflation would fall as low as 3.2 per cent.
Economists at the consultancy Pantheon Macroeconomics meanwhile said it expected May inflation to match Bank of England forecasts showing a 3.4 per cent rise due to higher package holiday and clothes prices.
Its weekly report suggested that a lower estimate would be optimistic.
Fresh data will come just over a week after the ONS revealed the unemployment rate crept up to 4.6 per cent and wage growth hit 5.2 per cent in the three months to April.
Easing inflation, lower wage growth and declining levels of employment may encourage more Monetary Policy Committee (MPC) members to vote for an interest rate cut on Thursday.
But volatility in oil prices, caused by an escalating conflict in the Middle East between Israel and Iran, may drive fresh inflation fears and lead to prices rising again.
Economists at the Bank will also be closely monitoring the impacts of global trade turmoil – through supply chain disruptions and weakened demand – on UK prices.
Minutes from the MPC’s meeting on Thursday will likely provide some insight into what Bank officials are most worried about as another economic shock looks set to hit UK firms.