Core Inflation is unchanged – again!

The CSO have just published the Consumer Price Index for May.  The headline figure is that the overall rate of deflation has eased from –2.1% in April to –1.1% in May.  The suggestion is that the period of deflation may be coming to an end.  We doubted this in April and we continue to doubt it.
This slowing in the rate of deflation is driven almost entirely by two price sectors

• Energy makes up 7.8% of the index and is up 1.9% on the month.
• Mortgage Interest makes up 6.7% of the index and is up 6.1% on the month.

The CPI rose 0.6% between April and May, however Energy contributed 0.17% and Mortgage Interest 0.32%.   Energy prices rose largely because the Carbon Tax on Liquid Fuels introduced in last December’s budget came into effect in May.  Mortgage Interest rose as our beleaguered banks have been increasing variable mortgage rates.
Excluding these two categories, the remaining 85% of the index only contributed to a price rise of 0.11%.  On the whole prices were unchanged in May.  This gives us our measure of core inflation.
The rate of core deflation is not easing.

We can clearly see that overall CPI inflation rate has increased continually since the lows of October 2009.  On the other hand the core inflation rate which excludes the effect of mortgage interest and energy has shown no such improvement.  It was –2.8% in April and only moved to –2.7% in May.