UK inflation figures, due 16 May, are expected to show that the foray into negative territory last month was temporary, resulting in part from volatility in airfares because of the shift in the timing of Easter relative to last year. As such, annual CPI inflation is likely to rise from -0.1% to 0.1% in May as this effect unwinds, helped also by indications that supermarket discounting has not intensified and higher fuel forecourt prices, estimates Lloyds Bank.
In fact, analysts believe inflation will trend higher over the next few months and could be just above 1% by the end of the year, with further rises in store in 2016, adds Lloyds Bank. Therefore in spite of the current very low level of inflation, the medium-term outlook will warrant higher interest rates, possibly as early as later this year, as underlying cost pressures from the labour market continue to build.
Uncertainties surrounding the outcome of negotiations between Greece and its creditors remain the principal focus in the euro area, with further discussions today by the Euro Working Group ahead of the Eurogroup meeting on Thursday. Data wise, the expectations index of the German ZEW survey is expected to show a further decline in investor confidence to around 37 in June, says Lloyds Bank. In the afternoon session, there is a risk of a pullback in US housing starts and permits, but the key message is that underlying trends in the sector remain positive.
