Underlying Inflation Picks Up as CPI Inflation Falls

Consumer price inflation decreased by 0.3 percentage points to 0.5 per cent in the year to May 2020, as per data released by the ONS. Our new analysis of 89,142 locally collected goods and services indicates price declines in the transport, recreation and culture, and hotels and restaurants categories. By contrast, underlying inflation, which excludes the most extreme price changes, increased in 11 UK regions, with only London recording a reduction in underlying inflation. The broad-based increase in underlying inflation led to a 0.2 percentage point increase in the national figure, to 1.2 per cent in May. This is the third month of increase in underlying inflation and for that reason our forecast suggests headline CPI inflation above 2 per cent in the 12 months to May 2021.

Main points

• Underlying inflation increased by 0.2 percentage points to 1.2 per cent in the year to May 2020, as measured by the trimmed mean, which excludes 5 per cent of the highest and lowest price changes (figure 1).
• At the regional level, underlying inflation was highest in the Wales at 2.5 per cent and lowest in London which saw a reduction of 0.1 per cent in the year to May 2020 (table 1).
• 22.7 per cent of goods and services prices changed in May, implying an average duration of prices of 4.4 months. 6.3 per cent of prices were reduced due to sales, 4.2 per cent fell for other reasons and 12.1 per cent were increases (figure 2).
• The historical relationship between current trimmed mean inflation and future CPI inflation implies CPI inflation above 2 per cent in the year to May 2021.

“Headline CPI inflation decreased to 0.5 per cent in the year to May 2020, down from 0.8 per cent recorded in April. Our analysis of approximately 89,000 goods and services included in the basket indicates lower prices in the transport, recreation and culture, and hotels and restaurants categories. Our measure of underlying inflation, which excludes extreme price movements, increased to 1.2 per cent in May thanks to an increase in underlying inflation in 11 of the 12 UK regions. On this basis, we expect CPI inflation to settle slightly above the Bank of England’s target of 2 per cent in the coming year.”

Janine Boshoff, Economist, Macroeconomic Modelling and Forecasting

Read the full analysis here