LONDON (MNI) – Analysts’ median forecast for the headline UK CPI
inflation rate is 3.5% in May, down from the 17-month high of 3.7% in
April, as petrol prices rose at a weaker rate than a year ago and on
expectations that clothing and footwear, which jumped 2.2% last month,
will stabilize.

The CPI’s all-goods CPI rate rose to an annual rate of 4.0%, the
highest since October 2008, with prices for the clothing and footwear
component coming in at -0.6% annually from -2.6% the month prior. This
was the highest level since the official series began in January 1997.

The return of the full Value-Added Tax rate of 17.5%, which was
temporarily reduced to 15.0% as part of the Labour government’s stimulus
measures, has been a contributing factor to the persistently higher
inflation rates in both CPI and the Retail Price Index, which includes
housing costs. The RPI annual rate rose to an 18-year high of 5.3% in
April.

Many economists are looking for May’s annual CPI rate to not only
ease, but to mark the beginning of a downward trend that some say will
take the UK inflation rate below 3% in the third quarter and possibly
bottom out around 1.5% in mid-2011.

“Consumer price inflation should head down further over the coming
months,” said Howard Archer, chief European economist at IHS Global
Insight.

Oil-price related base effects are expected to become more
favorable.

Philip Shaw, chief economist at Investec, said oil prices rose 0.8%
in May 2010, much less than in spring 2009 when the crude oil market was
recovering from a steep sell-off.

Food costs could also weaken and ‘favorable’ effects from the
timing of the UK Budget could also lead the UK May CPI rate down, with
the budget imposed duty rises coming in May last year and April this
year.

Stripping out the volatile food and energy components, the core CPI
rate is also expected to ease to a median 2.9% from 3.1% in April.

“Underlying price pressures should be contained by substantial
excess capacity, likely bumpy and gradual recovery, wage moderation amid
high unemployment and job insecurity, and the need for retailers to
price competitively in the face of still fragile consumer spending,”
said Archer.

That view is similar to Bank of England governor Mervyn King’s. In
his letter to Chancellor George Osborne explaining why the CPI rate in
April remained 1% percentage point above the bank’s target for three
months running, King said that the ‘temporary’ effects of VAT, oil and
sterling’s depreciation were masking the downward pressure on inflation
from ‘the substantial margin of spare capacity in the economy.’

King also acknowledged that policy makers were aware of risks to
inflation in both directions, and that if the current period of
above-target inflation caused inflation expectations to move up then
that could lead to ‘some persistence in the current high level of
inflation.’

In the BOE’s recent quarterly inflation expectations survey, the
median forecast was for inflation to rise in the next 12 months to 3.3%
versus 2.5% in the March report.

“That’s large, but I don’t think that’s particularly troubling,”
said Malcolm Barr, economist at JP Morgan.

It’s the persistent rise in the core CPI rate, which has been
gradually rising since January 2009 when it was at 1.3% — that is
making Barr a little jumpy. Excluding the volatile food and energy
components, core CPI rose to 3.1% in May, the highest level since
current records began in January 1997.

Barr and other economists are looking for the core annual CPI rate
to fall to 2.9% in May, but “if that doesn’t play to script then I’d
start to worry about whether we miscalibrated the pass-through of
sterling’s decline.”

Need To Know News will broadcast the UK CPI report, live, on Scream
Audio at 0930 BST on Tuesday, June 15.

–London Bureau; Tel: +44107 862 7490; e-mail:ukeditorial@marketnews.com

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