UK inflation unexpectedly stayed at a one-year low last month, despite average petrol prices rising to the highest level for almost four years.
The consumer prices index (CPI) remained at 2.4% in May for the second month running, according to the Office for National Statistics, confounding economists’ expectations for the rate to increase to 2.6% amid rising global oil prices.
Statisticians said the falling cost of computer games, sweets and chocolate helped to offset the rising price of petrol, as British motorists came under growing financial pressure. The ONS said the average price of petrol rose by 4.6 pence a litre between April and May to 125.3 pence last month – the highest level since October 2014.
Crude oil prices on global markets are now more than 40% higher than a year earlier. Having a knock-on effect for petrol prices, the RAC said some retailers have raised their prices every day since mid April.
The ONS also recorded the first annual fall in private rental prices in London since September 2010, which were down 0.2% in the 12 months to May. Average house price growth across the UK also slowed, falling to a rate of 3.9% in the year to April, down from 4.2% in March.
While the surprise inflation reading may comfort hard-pressed consumers, hit by a sharp increase in living costs since the EU referendum, the latest snapshot from the ONS could add to pressure on the Bank of England to delay raising interest rates as the UK economy falters. Weak economic growth deterred the central bank from raising the cost of borrowing last month.
Threadneedle Street said at the time it expected inflation to rise over the coming months owing to higher global oil prices and energy bills, before resuming a downward trend. Inflation has gradually been fading from a five-year high of 3.1% in November, as the effects of the sudden fall in the value of the pound after the Brexit vote begin to fade.
The inflation data followed news on Tuesday of an unexpected slowdown in wage growth, which could also deter the Bank from raising the cost of borrowing. Pay rises are only just outstripping the rate of inflation, with average earnings growth excluding bonuses growing at an annual rate of 2.5%.
Frances O’Grady, the TUC general secretary, said: “The case for higher interest rates is falling further away. Instead of an autumn rate rise, we will need an autumn boost in the budget to get the economy moving and wages rising faster.”
However, some economists believe the high prices for petrol and diesel could mean inflation sticking close to 2.5% over the course of the summer, which may spur the Bank to raise the cost of borrowing. Threadneedle Street has a target rate of 2% set by the government.
Coming at a time of weak economic data, with Britain close to the bottom of the G7 growth league, Andrew Sentance, senior economic adviser at PwC and former member of the Bank’s rate-setting committee, said the UK seemed to be in a period of stagflation – a term used by economists to describe low levels of growth coupled with high inflation.
Inflation sticking stubbornly above target could push Threadneedle Street to raise the cost of borrowing, he said, adding: “The combination of Brexit and the Bank’s reluctance to raise interest rates is creating a very uncomfortable position for the UK economy.”