1. Inflation Report May 2017
Costs and prices

2. Chart 4.1 CPI inflation is projected to have risen in April CPI inflation and Bank staff’s near-term projection(a)
(a) The beige diamonds show Bank staff’s central projection for CPI inflation in January, February and March 2017 at the time of the February Inflation Report. The red diamonds show the current staff projection for April, May and June The bands on each side of the beige and red diamonds show the root mean squared error of the projections for CPI inflation one, two and three months ahead made since 2004.

3. Chart 4.2 Faster rises in goods prices have pushed up inflation Contributions to CPI inflation(a)
Sources: Bloomberg, Department for Business, Energy and Industrial Strategy, ONS and Bank calculations.
(a) Contributions to annual CPI inflation. Figures in parentheses are CPI basket weights in 2017.
(b) Bank staff projection. Electricity and gas price projections incorporate announced price increases. Fuels and lubricants estimates use Department for Business, Energy and Industrial Strategy petrol price data for April 2017 and are then based on the May 2017 sterling oil futures curve, shown in Chart 4.3.
(c) Difference between CPI inflation and the other contributions identified in the chart.

4. Chart 4.3 Energy prices have fallen over recent months but remain higher than a year ago Sterling oil and wholesale gas prices
Sources: Bank of England, Bloomberg, Thomson Reuters Datastream and Bank calculations.
(a) US dollar Brent forward prices for delivery in 10–25 days’ time converted into sterling.
(b) One-day forward price of UK natural gas.
(c) Fifteen working day averages to 3 May and 25 January 2017 respectively.

5. Chart 4.4 Profit margins for consumer-facing firms narrowed over 2016 Estimated margins on consumer goods and services(a)
Sources: ONS and Bank calculations.
(a) Calculated as differences in the ratio of the CPI, seasonally adjusted by Bank staff, and estimated costs of production and distribution for consumer goods and services. Costs consist of labour, imports, energy and tax, weighted to reflect their intensity in CPI. The underlying weights attached to each component are based on the United Kingdom Input-Output Analytical Tables 2010, adjusted to reflect the composition of CPI. Where applicable, the weights capture each factor’s contribution to all stages of the domestic production process.

6. Chart 4.5 Higher import prices are feeding through to higher consumer prices Import-intensive CPI inflation and survey indicators of output price inflation
Sources: Bank of England, CBI, IHS Markit, ONS and Bank calculations.
(a) The import-intensive CPI series weights together the 20 CPI components with the highest import intensities accounting for indirect imported inputs, excluding fuel and administered and regulated prices. CPI data have been adjusted by Bank staff for changes in the rate of VAT, although there is uncertainty around the precise impact of those changes. Quarterly average of monthly data.
(b) Indicators included in swathe are: manufacturing output producer price index excluding food, beverages, tobacco and petroleum; Markit/CIPS output prices for manufacturing; CBI Industrial Trends expected selling prices; and Bank Agents’ final imported goods cost scores. Adjusted to match the mean and variance of import-intensive CPI inflation since Data are up to 2017 Q1.

7. Chart 4.6 Unit labour cost growth has been fairly stable Decomposition of four-quarter whole-economy unit labour cost growth(a)
Sources: ONS and Bank calculations.
(a) Whole-economy labour costs divided by GDP, based on the backcast of the final estimate of GDP. The diamond shows Bank staff’s projection for 2017 Q1.
(b) Self-employment income is calculated from mixed income, assuming that the share of employment income in that is the same as the share of employee compensation in nominal GDP less mixed income.

8. Tables

9. Chart 4.A The impact of the fall in sterling on import prices has so far been somewhat limited Import prices and foreign export prices excluding fuel
Sources: Bank of England, CEIC, Eurostat, ONS, Thomson Reuters Datastream and Bank calculations.
(a) Domestic currency non-oil export prices for goods and services of 51 countries weighted according to their shares in UK imports. The sample excludes major oil exporters.
(b) Domestic currency non-oil export prices as defined in footnote (a) divided by the sterling effective exchange rate.
(c) Calculated as 60% of the change in sterling world export prices. As explained in the box on pages 28–29 of the November 2015 Report, Bank staff estimated that, on average, 60% of changes in sterling world export prices have tended to be reflected in UK import prices.
(d) UK goods and services import deflator excluding fuels and the impact of MTIC fraud.

10. Table 4.B Monitoring the MPC’s key judgements

11. Table 4.C Indicators of inflation expectations(a)
Sources: Bank of England, Barclays Capital, Bloomberg, CBI (all rights reserved), Citigroup, GfK, ONS, TNS, YouGov and Bank calculations.
(a) Data are non seasonally adjusted.
(b) Dates in parentheses indicate start date of the data series.
(c) Financial markets data are averages from 3 April to 3 May YouGov/Citigroup data are for April.
(d) The household surveys ask about expected changes in prices but do not reference a specific price index, and the measures are based on the median estimated price change.
(e) In 2016 Q1, the survey provider changed from GfK to TNS.
(f) CBI data for the manufacturing, business/consumer services and distributive trade sectors, weighted together using nominal shares in value added. Companies are asked about the expected percentage price change over the coming twelve months in the markets in which they compete.
(g) Instantaneous RPI inflation one year ahead implied from swaps.
(h) Bank’s survey of external forecasters, inflation rate three years ahead.
(i) Instantaneous RPI inflation three years ahead implied from swaps.
(j) Five-year, five-year forward RPI inflation implied from swaps.

12. Measures of domestically generated inflation

13. Chart A Some measures of DGI have risen, although most have been stable Measures of domestically generated inflation(a)
Sources: ONS and Bank calculations.
(a) Unit labour costs are whole-economy labour costs and self-employment income divided by GDP, based on the backcast of the final estimate of GDP. Unit wage costs are wages and salaries and self-employment income divided by GDP, based on the backcast of the final estimate of GDP. Services CPI excludes airfares and package holidays; also excludes education and VAT as these have been volatile in recent years; where Bank staff have adjusted for the rate of VAT and there is uncertainty around the precise impact of those changes. All data are quarterly and up to 2016 Q4, except services CPI which are quarterly averages of monthly data and up to 2017 Q1.