Inflation returned to a positive level in May, with a 0.1% increase in the consumer price index (CPI) in the preceding twelve months.
The news came from the Office for National Statistics (ONS) on 16 May, marking the end of an extremely short period of deflation in April.
According to the ONS, the prices for food and fuel remain lower than they were a year ago, despite having risen on a monthly basis. Much of the downwards pressure came from certain types of recreational goods such as games, hobbies, toys and IT equipment.
It should be observed that April’s dip can be attributed in large part to Easter 2015 falling earlier than normal, meaning that increases in air and sea fares normally captured in April’s data were in fact captured earlier. This presumably contributed to a weaker April than is typical, and a concomitant upswing in May. It could be that inflation returns to zero in June, but in any case it remains far below the Bank of England’s 2.0% target 1.
Effect on mortgage rates
Though a further cut in the Bank of England base rate (BBR) – which has remained at an all-time low of 0.5% since 2009 – was always unlikely, there was a small chance that a more protracted period of deflation could have forced the Bank’s hand.
Speaking in February this year, Bank of England Governor Mark Carney said that the Bank had the “will, means and responsibility” to take further action in the event that negative inflation took hold 2.
Though experts have been quick to point out that a return to deflation is not out of the question, and that the CPI is likely to remain at this level for some time 3, this temporary reprieve means that the chance of further cuts has, for the time being at least, disappeared.
- Monetary policy framework. Bank of England. N.D. Accessed on 16 Jun 2015.
- Dew, L. and Fedorova, A. “Carney: we are prepared to cut rates further if deflation takes hold”. Mortgage Solutions. 12 Feb 2015.
- Walker, P. “Markets unfazed by slight return to inflation”. FT Adviser. 16 Jun 2015.