Headline consumer prices increased 2.4% in the twelve months to May 2018, a shade behind expectations at 2.5%. Unsurprisingly given the rally in oil prices seen earlier in the second quarter, the biggest upward contribution came from transportation costs, however a slower than anticipated rise in the price of video games offset the increase. Inflation has been running ahead of the Bank of England’s 2% target for over a year now but has fallen back significantly since its peak in November as the impact of weaker sterling has moderated. Despite relatively poor UK economic data in the first quarter of 2018 the Monetary Policy Committee remains convinced that a combination of global growth and tightening economic conditions will stimulate UK inflation, justifying interest rate rises at a ‘gradual pace’ in the near future. This view is predicated upon an economy progressing in-line with forecasts though, and today’s miss may feed in to investors’ views on how likely we are to see a hike in the third quarter of the year.
Jonathan Chitty, Investment Analyst