Tue Jun 16 03:30:00 CDT 2015

Consensus Actual Previous
Month over Month 0.2% 0.2% 0.2%
Year over Year 0.1% 0.1% -0.1%

April inflation's dip into sub-zero territory proved short-lived as a 0.2 percent monthly rise in consumer prices in May lifted their annual rate back up to 0.1 percent, a couple of ticks above their mark at the start of the quarter. The outcome was in line with market expectations.

The annual headline rate was boosted by a 0.6 percent monthly jump in transport costs which compared with a 0.7 percent fall over the same period in 2014. Air transport fares were notably firm but this may have been a function of the timing of Easter. Higher petrol charges also had a positive impact. The other main lift came from food and non-alcoholic drinks where a 0.1 percent monthly dip was much smaller than the 1.1 drop posted a year ago. On the downside the principal effect was from recreation and culture where prices fell 0.1 percent versus April after a 0.4 percent rise in the same period in 2014.

As a result, the core CPI edged just 0.1 percent firmer on the month although even this was enough to nudge the annual underlying rate a tick higher to 0.9 percent.

Today's data are in line with the BoE forecast contained in its May Inflation Report and so should have few immediate implications for monetary policy. Bank Rate still looks likely to be at 0.5 percent come the end of the year.

The consumer price index (CPI) is defined as an average measure of the level of the prices of goods and services bought for the purpose of consumption by the vast majority of households in the UK. It is calculated using HICP methodology developed by Eurostat, the European Union's statistical agency. The CPI is the Bank of England's inflation measure.

The consumer price index is the most widely followed indicator of inflation. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. In countries such as the UK, where monetary policy decisions rest on the central bank's inflation target, the rate of inflation directly affects all interest rates charged to business and the consumer.

Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets - and your investments.

Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.

By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.

For monetary policy, the Bank of England generally follows the annual change in the consumer price index which is calculated using the European Union's Eurostat methodology so that inflation can be compared across EU member states.