Tuesday 16 June 2015 4:12 am

UK shrugs off deflation as prices rise 0.1 per cent in May

Inflation rose by 0.1 per cent in the year to May according the Office for National Statistics, up from -0.1 per cent a month earlier, and ending a brief spell of deflation.

"The largest upward contribution to the change came from transport services, notably air fares with the timing of Easter in April a likely factor in the movement," the ONS said.

"There were also significant upward effects from food and motor fuels."

At the same time, downward pressure came from falls in the price of toys as well as computer games.

Inflation had slipped into negative territory for the first time since the 1960s in April. But economists predicted this would be temporary – saying the price of air and sea fares were significantly lower than this time last year due to the unusual timing of Easter.

So far, low inflation has been a boon for workers, whose real take home pay has increased – the Resolution Foundation suggested yesterday that employment data due out later this week will show average weekly wages rose at the fastest pace since 2007 in April.

It predicts average weekly wages swelled between 2.5 per cent and 2.6 per cent year-on-year. And when combined with inflation falling 0.1 per cent in April, real wages rose between 2.5 to 2.7 per cent.

"Today we see further evidence of an economic plan that is working, with a powerful mix of low prices and rising wages, which are continuing to grow well above inflation," Chancellor George Osborne said.

"This is good news for working people and family budgets, and shows the economic recovery is going from strength to strength."

(Source: ONS)

The Bank of England has previously said it expects inflation to hover around zero before rising "notably" towards the end of this year, as the impact of low oil and food prices fade away.

However, economists said today inflation is still well below the Bank of England's target of two per cent – meaning it remains unlikely to hike interest rates anytime soon.

"The recent strengthening of sterling, which has the effect of reducing the cost of imports, will help offset the [impact of rising oil prices]," Chris Williamson, chief economist at Markit, said.

"The bank will also be in no rush to start raising interest rates merely on the back of higher oil prices, and policymakers will want to see evidence that core inflation and wages are showing more convincing upturns."

"Inflation of only 0.1 per cent in May hardly increases pressure on the Bank of England to raise interest rates anytime soon," Howard Archer, chief economist at IHS, said.