A fall in transport costs and cheaper clothing brought to an end the recent rise in inflation that threatened to push the Bank of England to increase interest rates.
Energy costs, which spiked in April, and a price war in the car industry following a slump in sales over the past year also helped to bring down the consumer prices index (CPI) from 2.1% in April to 2% in May. Transport costs fell by 3.8% overall between April and May this year, led by falling air fares.
Bank of England policymakers meet on Thursday to judge the health of the economy and decide whether it is overheating and in need of higher interest rates to cool it down.
Inflation has risen steadily since January when it dropped to 1.8%. May’s fall in average prices, while modest, is expected to persuade all nine members of the monetary policy committee that there is little pressure building in the economy from rising inflation and to maintain the bank’s base rate at 0.75%.
The Office for National Statistics said there were small increases in prices for most goods and services, with the largest rises coming from games, toys and hobbies. There were also larger than expected increases in furniture and furnishings.
Howard Archer, the chief economic adviser to the EY Item Club, an economic forecaster, said inflation was likely to stay flat for the rest of the year while Brexit uncertainty and a downturn in global trade weakened the outlook for GDP growth in the UK.
He said: “With the economy clearly having a difficult second quarter and likely to be hampered by prolonged Brexit uncertainties, we believe the odds strongly favour the Bank of England keeping interest rates at 0.75% through 2019.
“In the near term at least, an unsettled UK domestic political environment and a difficult global economic environment reinforce the case for unchanged interest rates, while recent markedly oil prices are a benign development on the inflation front and increase scope for a cautious approach on monetary policy.”
Until the summer of last year the price of clothing and footwear was increasing each month. In the autumn, retailers were forced into heavy discounting that has resulted in prices declining in every month since October 2018.
Another signal of the UK’s waning economic health could be seen in the CBIs monthly survey of the manufacturing industry, which found the sector failed to grow this month after a slump in car production.
Trucks and vans fared better than cars but vehicle production still proved to be a drag on output, with only the chemicals, food, drink and tobacco industries providing growth. Motor vehicle manufacturing fell at the fastest since March 2009, the CBI said.
The survey of 308 businesses also revealed that total order books deteriorated further on the previous month to their lowest since October 2016. The lower value of sterling supported a rise in export orders, which improved slightly in the three months to June to move back above the long-run average.
Alpesh Paleja, the business group’s principal economist, said: “There’s clear evidence that Brexit uncertainty is really biting, with our surveys showing volatility in both stocks and output in recent months.”
Official estimates of gross domestic product (GDP) growth in April showed the British economy plunged by 0.4% from a month.
Earlier this week the British Chambers of Commerce said growth would slow in 2020 and 2021 after it slashed its forecast for GDP growth covering next year to only 1%, from 1.3%, marking the weakest expansion in the British economy since the 2009 recession.
Jesse Norman, the financial secretary to the Treasury, welcomed the inflation rate hitting the Bank of England target of 2%, “keeping costs down for consumers and businesses across the country”.