UK Inflation Remains at 4.5%

The Consumer Prices Index (CPI) annual rate of inflation remained steady at 4.5% in May, according to the Office for National Statistics (ONS).

The Retail Prices Index measure of inflation, which includes mortgage interest repayments, also remained unchanged at 5.2%.

Food and fuel prices are said to be the main contributors to the rate of inflation, with both having risen 1.3% from April. However, the rise in fuel prices was largely offset by a decline in transport costs, which had been higher in April because of increases in air fares over the bank holidays due to Easter and the royal wedding.

Over the past 12 months, alcohol and tobacco recorded a 9.8% increase - the highest year-on-year rise on record, partly because of a rise in VAT.

The Bank of England expects CPI inflation to rise above 5% over the next three months – well above the target of 2%. Jonathan Loynes of Capital Economics said: “Food price inflation ... rose a bit more sharply than we had expected. Further rises in [food price inflation], along with recently announced further energy price hikes, are likely to take the headline inflation rate above 5% perhaps, and perhaps even above 5.5%."

Although many believe that raising interest rates would be the most effective way to combat rising inflation, the Bank of England has so far resisted calls to do so as the rise in inflation is due to temporary, external factors, such as rising oil and food costs, are causing price rises. The Bank of England believes that raising interest rates could slow economic recovery.

The overall inflation figure for May was in line with market expectations. It follows an increase from 4% in March to 4.5% in April – the highest rate since October 2008.

By Sarah Hill

[Image courtesy of James .Stringer]