The latest release of the UK inflation figures has failed to provide a boost to the pound. Despite the recent Brexit optimism, the pound did not rise further after the latest inflation figures which came in line with expectations.
The GBP did not react to the news that inflation fell to 0.5% during May as it was expected. Sterling’s upside is also considered to be limited as traders are expected to remain cautious ahead of the latest monetary policy update by the Bank of England on Thursday. The BoE is expected to keep rates at 0.1% and increase its quantitative easing programme by £100bn.
According to the Office for National Statistics, the UK consumer price inflation eased for the fourth consecutive month in May, coming at an annual rate of 0.5%, meeting expectations. Inflation has fallen after a record fall in fuel prices which dragged the UK's inflation rate down. This was due to the lockdown as May was the second full month of the coronavirus lockdown restrictions. This was the lowest annual rate recorded since the Brexit referendum vote in June 2016.
Economists said that this will inevitably add to the discussions of whether the Bank of England will likely take Bank rates into negative territory.
ONS deputy national statistician Jonathan Athow said: “The growth in consumer prices again slowed to the lowest annual rate in four years. The cost of games and toys fell back from last month’s rises, while there was a continued drop in prices at the pump in May, following the huge crude price falls seen in recent months. Outside these areas, we are seeing few significant changes to the prices in the shops.”
Rising prices for food and non-alcoholic drinks helped offset the pressure from the falling oil and petrol prices in May.
What economists say
Economist James Smith explained that the UK inflation will stay below 1% this year:
“The other argument that is often made in favour of inflation returning, is that governments and central banks are pumping vast amounts of cash into the system. But this is unlikely to lead to higher prices, at least in the short/medium-term. In the case of the government, its spending has so far been solely aimed at keeping firms and consumers afloat, rather than trying to stimulate demand (which by definition, is constrained by the ongoing lockdown measures). The bottom line is that inflationary pressures are likely to remain fairly muted for the time being. This, in turn, will keep the pressure on the Bank of England to maintain its current degree of stimulus, and we expect a further £150 billion of QE to be unveiled this week.”
Chief UK economist at Capital Economics, Paul Dales, also said that "May's further fall in inflation is probably only the beginnings of a prolonged period of very soft price pressure." This he clarified, will drive MPC members to ask for more stimulus to boost the economy on the BoE’s policy meeting on Thursday.
For many businesses and consumers, the year ahead appears to be a very tough one, with more pressure on households. Businesses and employers have been hurt, and there is generally pessimism about the status of the UK economy due to the coronavirus and a possible second wave of Covid-19 cases.
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