Instant view - May CPI falls more than forecast

LONDON (Reuters) - Consumer price inflation fell slightly faster than expected in May, helped by a fall in food costs and slower rises in the price of petrol, alcohol and tobacco, the Office for National Statistics said on Tuesday.

ANALYST COMMENTS

ROSS WALKER, RBS FINANCIAL MARKETS

"The figure is a little bit better than expected. The fact that we didn't see any cuts in domestic electricity prices was the main surprise and shows there is more moderation elsewhere.

"We thought that the peak would be around about April and it may be that it starts to drift down from here, but I still think the rate of decline will be much more modest than the Bank's central projections."

JONATHAN LOYNES, CAPITAL ECONOMICS

"May's UK consumer prices figures might help to ease recent concerns about the outlook for inflation a little. We were worried that the median forecast of a fall in the headline CPI rate from April's 3.7 percent to 3.5 percent was a bit optimistic, so the outturn of 3.4 percent is a pleasant surprise.

"Admittedly, some of the drop reflects a bigger fall in food prices than we had anticipated, which may not be sustained. Meanwhile, petrol prices rose by less than we had feared. Nonetheless, there is genuine good news in the fall in core inflation from 3.1 percent to 2.9 percent, driven by a further drop in core goods inflation.

HOWARD ARCHER, IHS GLOBAL INSIGHT

"May's retreat in consumer price inflation will be of some relief to the Bank of England and boosts its case that inflation will head down significantly over the coming months and be back under the target level of 2.0 percent by early-2011 barring a VAT hike. As such, it reinforces our belief that the Bank of England is more likely than not to keep interest rates down at 0.50 percent into 2011 as recovery remains bumpy and gradual with major fiscal tightening and the Eurozone debt crisis posing serious threats to growth prospects.

"However, we do acknowledge that there is a very real chance of at least a token interest rate hike before the end of the year if inflation continues to provide upside surprises over the coming months."

JAMES KNIGHTLEY, ING

"This is the first fall since February and offers some hope that inflation will start to head lower as it has elsewhere in

developed markets.

"Yet in the UK core inflation is at 2.9%. This underlines the one off factors hitting the UK of the VAT hike and lagged effects of sterling weakness. As these fade and the underlying issue of spare capacity starts to exert its influence we too are likely to see sharp falls in core inflation.

"Oil prices have also fallen back sharply and this should also help to drive the headline rate lower in coming months -- as will sterling's recent appreciation on a trade weighted basis. Consequently we continue to doubt the need for any monetary policy tightening especially when we are likely to see fiscal policy tightening or the order of 7-8 percent of GDP over the next four or five years exerting a major drag on the economy and further depressing inflation pressures.

"We continue to believe that deflation is a threat, but a higher VAT rate as part of next week's Budget plans should come to the rescue and prevent that happening, at least within the next twelve months."

ANDREW GOODWIN, ERNST AND YOUNG ITEM CLUB

"The May data is likely to mark the beginning of a gradual downward drift in inflation.

"The temporary factors which have kept inflation above 3% since the beginning of the year are beginning to fade and the massive amount of spare capacity in the economy is likely to become increasingly influential over the coming months. The fact that CPIY - the measure that excludes indirect taxes - remains below 2 percent demonstrates the importance of VAT in pushing up the headline rate of inflation and suggests that underlying inflationary pressures remain under control.

"We do not see any reason to be particularly concerned about inflation at this juncture and the MPC appears to concur with this view. As such we continue to expect that interest rates will remain on hold for the remainder of this year."

PHILIP SHAW, INVESTEC

"There's a little bit of comfort from today's figures that the outturn is a little bit below expectations.

"It doesn't change the big picture which is that inflation remains well above target and also that it has been disappointingly high over the past year or so, and will contribute towards a very interesting debate on monetary policy over the coming months.

"Base effects suggest strongly that inflation will come down over the second half of this year, if only because of the influence of petrol prices, but individual categories such as clothing and footwear are instances where price pressures are relatively firm and perhaps need to be watched."

STEPHEN LEWIS, MONUMENT SECURITIES

"It's very slightly better than forecast but I'm not sure one can read too much into these month-on-month deviations.

"Food prices are a bit softer than I might have expected but everything else is pretty much in line."

"I think they (the Bank of England) will take some comfort from the fact that core CPI is down to 2.9 percent, but that's still way above target. That's not a very good performance."