According to the ONS, declining transport costs, air fares in particular, were the main cause of the decline, but said the timing of Easter in April probably also had an effect.
“With the exception of the April figure, which is likely to have been influenced by the position of Easter, the rate of inflation has fallen each month since Autumn 2013,” the ONS said.
Other large downward pressures were felt from the food and non-alcoholic drinks and clothing sectors, the statistics office said, but added that the rising cost of motor fuel stopped the rate of inflation falling even further.
“Average petrol and diesel prices rose slightly between April and May this year but each fell by over 3 pence a litre a year ago. Prices of games, toys & hobbies (particularly computer games) also rose this year but fell a year ago to offset the overall reduction in inflation,” it said.
In a note out ahead of the figures, Paul Hatfield, chief investment officer and head of Americas, at Alcentra said:
“We expect inflation will remain below historic levels in the US and the UK. The global economy remains in modest recovery mode in the developed world with the BRICs (Brazil, Russia, India and China) facing some real challenges.”
According to Hatfield, while falling prices could initially help to improve the cost structures of some companies, it is also likely to raise the real burden of high-yield issuers’ debt.
“This could create another round of financial stress in the European high yield universe, especially among weaker capital structures, and lead to increased corporate defaults which are currently near an all-time low but even if that happens, defaults are very unlikely to accelerate to a level that would cause us concern for the medium term,” he added.
Higher-quality issuers may actually benefit from deflation initially, although a prolonged deflationary situation would have a negative impact on the underlying economies and credit worthiness of all players in the sector. Looking ahead, stricter credit selection will be crucial.”
