Fuel price jump fails to budge UK inflation from one-year low

Fuel price jump fails to budge UK inflation from one-year low
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LONDON (Reuters) – British inflation held at a one-year low in May despite a jump in fuel prices, leaving the chances of a Bank of England interest rate hike over the coming months finely balanced.

Consumer price inflation remained at 2.4 percent in May, its joint lowest annual rate since March 2017, the Office for National Statistics said on Wednesday. Economists had forecast 2.5 percent inflation in a Reuters poll.

Inflation hit a five-year high of 3.1 percent in November, pushed up by the pound’s tumble after June 2016’s Brexit vote and contributing to a squeeze on consumer spending that has slowed Britain’s economy.

(GRAPHIC: Inflation in the UK and the euro zone – tmsnrt.rs/2e52HBm)

The BoE expects inflation to pick up again in the coming months after rises in oil prices and energy bills, then fall back towards its 2 percent target.

The odds on a BoE rate increase in the next few months lengthened a bit after Wednesday’s figures on signs that any acceleration in inflation would be limited, Scotiabank economist Alan Clarke said.

Other recent data, pointing to only a slow recovery in the economy after a weak start to 2018, have also suggested the BoE is unlikely to see an urgent need to raise rates.

“It’s just not screaming ‘hike, hike, hike’ now,” Clarke said. While inflation might rise to 2.6 or 2.7 percent in June, it was likely to resume falling in July and be back at the BoE’s target of 2 percent by the end of the year.

“There’s plenty more downside to come,” he said.

But Andrew Sentance, a former BoE policymaker who advises accountants PwC, said inflation would stay around 2.5 percent.

“The UK (is) close to the bottom of the G7 growth league and close to the top of the inflation league. The combination of Brexit and the Bank’s reluctance to raise interest rates is creating a very uncomfortable position for the UK economy,” he said.

The BoE raised rates in November, the first increase since before the 2008 financial crisis. But weak first-quarter economic growth caused it to postpone an increase that had been widely expected for May.

Most economists polled by Reuters have said they expect a move in August, but soft April data on wages and industrial output have caused some to have doubts. Clarke said markets priced in only a 50 percent chance of an August rise.

Fuel prices rose in May by 3.8 percent, the biggest monthly amount since January 2011. Manufacturers are paying 40 percent more for oil than they were a year ago.

Shoppers browse in an Aldi store in London, Britain, February 15, 2018. REUTERS/Peter Summers

However, the fuel price rise was offset by a drop in the cost of computer games and smaller rises in energy bills than a year earlier.

Manufacturers’ raw-materials costs were 9.2 percent higher than in May 2017, boosted by the biggest monthly jump – 2.8 percent – since October 2016 and above all forecasts in a Reuters poll.

Editing by Toby Chopra, Larry King

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