UPDATE 1-UK inflation rebounds more than expected in May

Tue Jun 18, 2013 5:28am EDT

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* Airfares lift UK consumer price inflation to 2.7 pct

* Economists say CPI still on track to fall gradually

*

By David Milliken and Olesya Dmitracova

LONDON, June 18 (Reuters) - British inflation rebounded more than expected in May, data showed on Tuesday, primarily because of rising air fares and in contrast to April's seven-month low.

Economists found little significance of the rise, seeing the inflation outlook ahead as generally benign.

Annual consumer price inflation rose to 2.7 percent in May from April's low of 2.4 percent, a bigger increase than economists had forecast though still below March's level, the Office for National Statistics said.

Market reaction was limited, and economists said they still believed inflation was on track to return to its 2 percent target sooner than the Bank of England had expected a few months ago because the pound has strengthened and commodity prices weakened.

May's 22 percent rise in airfares - the biggest jump for the time of year since records started in 2001 - did not change the broader picture of slowly falling inflation, economists said.

"Looking over a two or three month horizon, which I think you have to do, the inflation picture is a little better. But it is still above target and still a little bit sticky," said Ross Walker, an economist at Royal Bank of Scotland.

Economists had expected some rise in inflation this month as there had been a sharp fall in the annual rate of inflation in May 2012.

Nonetheless, the overall outlook for inflation is more benign than it seemed a few months ago.

Last month the central bank forecast inflation would peak at just over 3 percent later this year before falling back to 2 percent by early 2015 - a view still broadly shared by economists after Tuesday's data.

Separate figures published by the ONS on Tuesday also showed a relatively muted outlook for consumer price inflation. Factory gate prices - which act as a leading indicator for some parts of CPI - rose by an annual 1.2 percent, a smaller increase than economists had forecast.

But Britain's unusually cold weather this year may push up food prices, with the ONS reporting a 19.2 percent annual rise in the cost of home-grown food, and potatoes and fresh vegetables particularly hit.

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