Deflation will be short lived in UK

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In reaction to CPI turning negative in the UK for the first time in April to 0.1% (yoy), Ben Lord manager of the M&G UK Inflation Linked Corporate Bond Fund, says:

“CPI in the UK today fell into negative territory for the first time, posting a 0.1% decline year-over-year. Airfares presented a meaningful drag on the April figures, owing to the timing of Easter compared to last year. Carriers increase their prices over Easter holidays, so when Easter moves between months this causes flight prices to move around, thereby affecting the headline inflation numbers. However, petrol prices were up slightly on the month which offset some of this effect.

“The market expects that deflation will be short lived in the UK. By the end of 2015, on the assumption of oil’s stabilising here or hereabouts, CPI will be 0.8% to 1% higher than today’s numbers, as the negative drag of oil’s decline will fall out of the year over year comparisons.

“Also noteworthy is that with RPI in April registering a gain of 0.9% year over year, the ‘wedge’ – the extent of the difference between RPI and CPI – has increased to 1%, which is slightly higher than the long-term average. Whilst most of this difference owes to different calculation methodologies, some of this also owes to RPI’s greater inclusion of housing than CPI.

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