Inflation comment from the Chamber

Christian Spence, Research Manager at Greater Manchester Chamber of Commerce

CPI inflation fell to 1.5% in May, down from 1.8% in April RPI inflation fell to 2.4% in May, down from 2.5% in April

Commenting on the inflation data released today by the Office for National Statistics, Christian Spence, Head of Business Intelligence at Greater Manchester Chamber of Commerce, said: "Today's (17 June) sharper than expected fall in the headline CPI rate of inflation will be welcomed by businesses and households alike. This fall continues a trend of weakening inflation that we have seen over the past year, with the rate below the Bank of England's target for every month in 2014. The May data appears to indicate that last month's rise was indeed caused by seasonal effects - primarily the timing of Easter - with price inflation returning back to a trend. This month's fall has been driven by a weakening in service sector inflation falling to 2.2% from 2.8% in April and 2.3% in March; goods sector inflation has remained steady at a weak 0.9%.

"Within the production sector, output prices (factory gate prices) rose just 0.5% in the year to May 2014 with a small fall on the previous month with input prices (the total cost of goods consumed to produce products) falling by 5% on the previous year with the rate of deflation moderating slightly from April's figure of 5.3%. Falling input prices are being mostly driven by global market forces on commodities where the relatively weak international economy is moderating demand. Oil prices for the month of this data were benign with the recent relative strength of Sterling supporting the importing of deflation. This is likely taking some pressure off production companies who may be able to improve their own margins under these conditions, though current currency volatility may moderate some of that profitability when selling to overseas markets.

"Overall we believe the short- to medium-term horizon for inflation remains around the Bank of England's target of 2% with our relative currency strength being a primary driver. Internal demand in the UK economy is recovering strongly with GDP growth of around 3% per year and whilst inflation continues to run above the rate of annual pay increases we expect the forthcoming data for the next few months to show that the April pay rounds and beyond will finally deliver real-terms increases in salaries. This will be driven not only by the economic recovery and improved business environment but also by the significant tightening of the labour market over the recent past, placing employers under greater pressure to be able to recruit the staff they need to respond to the more positive economic environment."