U.K. headline inflation eases year-on-year in May

The U.K. headline inflation recorded its initial drop in four months in May, easing to 2 percent year-on-year from 2.1 percent year-on-year, consistent with median expectations, noted Lloyds Bank in a research report. The ‘core’ rate of CPI also eased to 1.7 percent year-on-year from 1.8 percent year-on-year in April as the spike in airfares related to the timing of Easter unwound. Significantly, the scale of the move in May move was anticipated in the Bank of England’s May Inflation Report and, as such, has little implication for the U.K. policy outlook.

The fall in the inflation rate of May CPI came in spite of the upward impacts in most categories of the inflation basket. The biggest upward impacts came from hotels & restaurants and recreational & cultural items. For the latter, this reflected changes in the composition of bestseller charts for computers games. Nevertheless, these moves were more than countered by a solid downward influence from transport services. Here, the biggest driver was the reversal of April’s sharp rise in airfares, where prices dropped 5.2 percent. In the meantime, the cost of new cars rose by less in May, said Lloyds Bank.

In terms of the RPI measure of inflation, the higher weight of airfares in the RPI basket relative to the CPI meant that the 5.2 percent fall had a bigger downward effect on the RPI. Alone this should have led to the annual rate of RPI inflation falling by around 0.2 percentage points to 2.8 percent. Nevertheless, a number of areas including insurance, motor fuel prices, sea fares, household goods and housing depreciation provided the offset, keeping the annual rate of RPI inflation remained the same at 3 percent year-on-year.

At 17:00 GMT the FxWirePro's Hourly Strength Index of was bullish at 77.8237 while the FxWirePro's Hourly Strength Index of US Dollar was neutral at -24.9724 more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex