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UK dodges second month of deflation

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The UK has risen out of deflation as the Consumer Prices Index increased by 0.1 per cent in May, after one-month of negative inflation in April.

The largest contribution to the increase came from from transport services, the Office for National Statistics says, while food and motor fuels also made a “significant” contribution.

These were offset by price falls in recreation and culture – particularly games, toys and hobbies (such as computer games) – and data processing equipment.

However, core inflation was only 0.9 per cent, after hitting a low of 0.8 per cent in April, which gives some cause for concern.

IHS Global Insight chief UK and Europe economist Howard Archer says: “We doubt that deflation will recur in the UK, although it cannot be completely ruled out if oil prices take a renewed appreciable downward lurch.

“We believe it is most likely that consumer price inflation will hover just above zero through the summer and then start heading decisively up from the autumn. This should be the consequence of base effects becoming less favorable, firmer oil prices overall, earnings growth picking up, and excess capacity in the economy diminishing.”

However, investors should still be wary of the figures, says Kevin Doran, chief investment officer at Brown Shipley.

He says: “With inflation rebounding out of negative territory, we could now see a steady rise as asset price inflation filters across and into real world inflation. Importantly however, I haven’t seen markets pricing a further rise and its potential risks correctly – I for one am avoiding fixed income, in part because of naïve inflation projections.”

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