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UK out of deflation after one month

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16/06/2015
The UK inflation rate has edged back into positive territory, rising to 0.1 per cent in May, up from minus 0.1 per cent in April, according to figures.

The biggest contribution to the move out of deflationary territory came from transport services, notably air fares, with the timing of Easter in April a likely factor in the movement, the Office for National Statistics (ONS) said.

There were also significant upward effects from food and motor fuels.

The UK Consumer Prices Index (CPI) fell below zero in April for the first time since official records began in 1996 and the first time since 1960 based on comparable historic estimates.

Jeremy Cook, chief economist at the international payments company, World First, said: “To be honest, there is little difference between 0.1% and -0.1% for the man in the street. Deflation or very low levels of inflation are both stimulatory for the UK economy as consumers continue to see real wage increases and spend accordingly.

“Where it does matter a little more is on Threadneedle St., and the Bank of England will be quietly thankful that we are back into positivity. Expectations are now that we have put in a ‘bottom’ in inflation and that the speed of price increases will gradually repair closer to target as the year goes on, and last year’s falls in energy prices fall out of the basket.

“I believe that once CPI hits 1.0% and is expected to remain stably above that mark, we will see the Monetary Policy Committee take the plunge and hike rates – that could be as soon as quarter 1 next year.”

Maike Currie, associate investment director, Fidelity Personal Investing, said: “Prices are low because of a fall in energy and food costs meanwhile wages are rising, albeit at a modest pace. The combination should boost consumer spending – the backbone of the UK economy.

“However low inflation means interest rates will stay lower for even longer. This means consumers’ gain is investors’ pain as a low growth, low return environment means savers and investors face an extended period of slim pickings. Anyone seeking a decent income will need to look to the stock market for better returns.”

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