UK climbs out of deflation as air fares rise

Solid story from http://www.telegraph.co.uk/finance/economics/11677538/UK-climbs-out-of-deflation-as-air-fares-rise.html

The UK has climbed back into inflation after its first encounter with deflation in 55 years.

Prices rose by 0.1pc on average in the year to May, according to the Office for National Statistics (ONS).

Statisticians said that the largest boost to inflation came from the transport sector, in part owing to a large rise in air fares.

A relatively early Easter this year meant dragged down inflation in April, taking the measure into negative territory for the first time since 1960.

This effect was reversed in May, leading inflation back above zero, after a decline of 0.1pc in the previous month.

Philip Gooding, of the ONS, said: “The falls in food and fuel costs over the last year have eased this month, helping to push inflation up.”

The timing of Easter was a key factor in the inflation data this year, and without its irregular position, the UK may never have experienced technical deflation at all.

George Osborne, the Chancellor, said that the off target figures supplied “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”.

Elizabeth Martins, an economist at HSBC, noted that May marked the second consecutive month of UK inflation below the eurozone level.

“Unlike in the eurozone, we don’t think inflation has quite bottomed in the UK,” she said.

A number of analysts believe that the consumer price index (CPI measure of inflation could come back down in June.

Capital Economics calculated that just a 10pc fall in the oil price could push the economy back into deflation within the next sixth months.

Even without such a shock, inflation is expected to stay low. Michael Saunders, an economist at Citi, said that “a fairly lengthy period of lowflation is likely, reflecting the subdued pace of pay growth” and the pound’s recent appreciation.

Inflation was held down in May by a 2.6pc fall in the price of consumer durables, the largest slide since 2009, as a result of sterling’s strength.

While Britain may have escaped a harmful deflationary spiral, Philip Shaw, of Investec, said that “the real question is whether Britain is beginning to depart a phase of lowflation”.

“This will take some time to assess which will not only involve appraising the next few months of CPI figures, but also supporting evidence such as trends in pay growth as well,” he said.

As oil prices have stabilised and the supermarket price war draws to an end, inflation is later expected to move on an upward path. “CPI will pick up fairly rapidly towards the end of the year,” Ms Martins said.

Inflation is still well below the Bank of England’s 2pc target, but the central bank anticipates that inflation will hit 1.7pc by the end of next year.