UK CPI inflation remains too high for comfort

The latest estimates for UK CPI inflation were firmer than expected in May. The headline inflation rate held steady while core inflation continued to rise. This will pile pressure on the Bank of England to raise its benchmark interest rate more aggressively in the weeks ahead.

The key elements of note from this data release were as follows-

• The consumer price inflation rate rose to 8.7% In May, maintaining its level from the previous month and exceeding the consensus forecast for a drop to 8.4%.

• On a monthly basis, the headline CPI index rose by 0.7% m/m in May after a climb of 1.2% in April.

• Much of the upward pressure on inflation came from a rise in prices for air travel, second-hand cars as well as recreational and cultural goods.

• Core inflation (which excludes energy, food, alcohol and tobacco) surged by 7.1% in the 12 months to May, up from 6.8% in April and the highest rate since March 1992.

• However, while core inflation rose, there was a slight easing in food price inflation which slowed to 18.4% yr/yr in May, after 19.1% in April.

• The inflation rate for goods fell to 9.7% in May, after 10.0% in April, largely as a result of a further fall in energy prices.

• Meanwhile, services inflation climbed by 7.4% in the year to May, up from 6.9% in April. This may be of particular concern to the Bank of England given the sensitivity of service sector inflation to wage pressures.

• Brighter news emerged today, however, from May’s release of producer price inflation. Specifically, headline output prices fell 0.5% m/m in May (after a downward revision to the previous month’s figures to -0.2% m-o-m), while core output prices were down 0.3% m/m and input prices fell 1.5% m/m.