Plunging prices of fuel and recreational goods has dragged UK inflation down to a four-year low, suggesting the “economy is still in dire straits” even as businesses across the country slowly reopen.
Price of goods in the UK fell further still in May, the second full month in lockdown, with the inflation rate tumbling to 0.5% after halving from 1.5% to 0.8% in April, according to the latest Office for National Statistics figures.
AJ Bell personal finance analyst Laura Suter said another drop in inflation was inevitable as “consumption practically ground to a halt in May, with large swathes of the country shut down due to the Covid-19 lockdown”.
The Consumer Prices Index 12-month inflation rate now stands at a four-year low, she noted, which is “a stark contrast to the 2% inflation we were seeing this time last year”.
“Another drop in inflation shows that, while life in the UK may be showing signs of returning to a semblance of normality, the economy is still in dire straits,” said Richard Pearson, director at investment platform EQi.
Posh crisps and chocolate partially offset plunging fuel prices
Despite oil prices rebounding in May, with Brent crude surging above $35 per barrel by the end of the month, transport continued to be the biggest downward contributor to the headline figure, resulting in a 0.08% decline, as prices at the pump dropped and forecourts remained empty as fewer people used their cars during the lockdown period. Average petrol prices stood at 106.2p per litre in May, which the ONS observed was the lowest since April 2016.
Recreational goods, such as toys, computer games and craft kits, which were among the few items to record price growth in April, saw this trend reverse in May, dragging the CPI rate down by 0.06%.
Partially offsetting this was rising food and non-alcoholic beverages prices which were up 0.5% compared with a smaller rise of 0.1% a year ago. The ONS noted treats like posh packets of crisps, packs of individual cakes and chocolate helped push prices up over the period.
Prospect for rate rises is non-existent
Willis Owen head of personal investing Adrian Lowcock said though the speed of the decline and the headline figure look “shocking”, inflation should pick up back toward the Bank of England’s 2% target later this year as the economy is rebooted.
“Either way, the downbeat outlook – and the looming unknown of Brexit – means the prospect for rate rises is non-existent,” he said.
Royal London Asset Management senior economist Melanie Baker expects the BoE to respond to the latest CPI readout with an extension of asset purchases when the monetary policy committee convenes on Thursday.
“Measures of core inflation are weak, and CPI is running roughly in line with the low near-term staff projection from the May Monetary Policy Report,” Baker said.
“As lockdown eases and more prices for consumer items become available, this may weigh even further on inflation.”
