UK inflation to pick up in H2

As expected, deflation in the UK proved temporary, with inflation increasing to 0.1% y/y in May from -0.1% y/y in April. Core inflation increased to 0.9% y/y in May from 0.8% y/y in March.

• The largest upward contribution came from air fares, which pulled the inflation rate up 0.08pp. The Office for National Statistics reported that changes in air fares in the spring vary notably year by year due to the timing of Easter. The rebound in air fares implies that service inflation increased to 2.3% y/y in May from 2.0% y/y in April.
  
  
• Food prices increased 0.1% m/m in May, their first m/m increase since December 2014. The food, alcohol, and tobacco component contributed 0.08pp to the increase in overall inflation in May.
  
  
• Higher fuel prices contributed to the increase in inflation, rising 1.8% m/m, to account for 0.05pp of the increase in inflation in May, notes Danske Bank.
  
  
• The strong sterling continued to pressure non-energy industrial goods prices. The annual rate of change declined to -1.2% in May from -1.0% in April, implying anegative contribution of -0.06pp to the overall change in inflation in May.
  
  
• The CPI is likely to pick up sharply in H2 when the base effects of the declines in energy and food prices begin to drop out, whereas, inflation is likely to reach around 1% at the end of this year and around 1.7% at the end of 2016, says Danske Bank. In other words, the very low inflation is likely to be only temporary. This should have the advantage of boosting consumption, and hence the UK's recovery, as UK citizens experience positive real wage growth for the first time since 2009.
  
  
• The Bank expects the MPC to hike rates in November this year as the medium-term inflation outlook still calls for tighter monetary policy, in our view. The low core inflation, strong sterling and fiscal consolidation present downside risks to our call, as they imply that the MPC may be more patient with the bank's first rate hike.