Inflation rate holds steady
NEW figures show CPI inflation remained at 4.5% in May.
The fact that the inflation rate remained the same as the April figure will strengthen the hand of those on the Bank of England’s Monetary Policy Committee arguing against the need for an imminent rise in interest rates.
The Bank of England’s latest quarterly bulletin, released earlier this week, said there was little evidence inflation was affecting behaviour such as wage settlements, further reducing the pressure for the MPC to take action.
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Georgina Mitchell, head of investment services at Redmayne-Bentley, said: “Today’s announcement supports the findings of yesterday’s quarterly bulletin that inflation is not ‘entrenched’ and will fall back in the longer-term – the stance that the MPC has taken since inflation first moved above 2%.
“So far employers have managed to keep wage inflation under control but it will require a continuation of this to see the MPC’s long-held view that this rise is only temporary finally coming true.”
The Office for National Statistics said a fall in transport costs was the main downward pressure between April and May but this was offset by a range of factors including rising food prices.
The RPI inflation figure in May fell remained the same at 5.2%.
Graeme Leach, chief economist at the Institute of Directors, said: “Clearly we still have a short-term inflation problem but the medium term threat is deflation, owing to the contraction in the money supply.
“There was a lot of upward and downward movement within the latest CPI figures but the overall story hasn’t changed. Economic weakness, spare capacity, slow wage growth, VAT effects and anaemic money supply all suggest that inflation will fall back very sharply in 2012.
“The softening in the economy already underway is sufficient to bring inflation under control, we do not need a tightening in monetary policy. Indeed if current money supply trends continue we will need to introduce QE2.”
