Inflation held steady in May, denting the prospects of a UK base rate rise soon.
Figures from the Office for National Statistics (ONS) show the Consumer Prices Index (CPI) remained at 2.4 per cent in May, unchanged from April and in line with economists’ expectations.
The data comes in light of wage growth also being weaker than expected.
Samuel Tombs, chief economist at Pantheon Economics, said the weak inflation data was the result of a lack of inflationary pressure in the domestic economy.
Ben Brettell, senior economist at Hargreaves Lansdown, said the cost of raw materials used by UK businesses has risen by 9.2 per cent over the past year, and this is the driver of inflation.
Most of those raw materials are imported.
Central banks want to raise interest rates if they fear the domestic economy is in danger of overheating because the demand for goods and services in the economy is rising at a faster pace than the supply of goods, such a situation leads to higher economic growth in the short-term,
But inflation rising because of higher raw materials costs is negative for economic growth.
This is because the greater costs reduce the profit margins of businesses.
According to Mr Brettell because they make less money on each item sold, they reduce production, which contributes to lower wages and higher unemployment, and lowers the level of demand in the economy.
This is the sort of inflation Mr Brettell believes is currently dominant in the UK economy.
The Bank of England’s target, which it was given by the government, is to achieve an inflation rate of close to 2 per cent.
The dilemma faced by the central bank right now as it ponders what direction to take the base rate is whether to ignore the fact inflation is currently above target, risking longer term damage, or to put the base rate up and risk harming the shorter term growth prospects of the economy.
Mr Brettell said he expects the Bank of England to wait for UK GDP growth to improve before putting the base rate up.
david.thorpe@ft.com
