Britons feel the squeeze as inflation rises to four-year high of 2.9%

Staff  reporter(wp):

UK inflation rose to a four-year high in May as the pound’s sharp fall since the Brexit vote worked its way through the economy, intensifying the squeeze on household budgets.

The increasing cost of computer games and package holidays helped push up inflation to 2.9% last month, above the expectation of economists that it would remain at the 2.7% rate seen in April. The year-on-year rise in the consumer prices index (CPI) means prices continue to go up faster than wages for many workers, further denting living standards.

Inflation has been steadily increasing since the EU referendum result a year ago, which triggered a sharp drop in the value of the pound and pushed up the cost of goods imported from abroad. Inflation was 0.3% in May 2016, a month before the Brexit vote.

Higher oil prices have also added to the upward pressure on inflation. But in the latest official figures, there was evidence that sterling was a key factor. Statisticians highlighted the rising prices of package holidays, reflecting the growing cost of travelling abroadfor Britons because of the weaker pound.

The Office for National Statistics said higher food and electricity prices also contributed to the inflation figure. This continues a pattern of essentials becoming increasingly expensive, leaving households with less to spend on treats. Consumer spending has slowed as a result, holding back the pace of overall economic growth.

The TUC general secretary, Frances O’Grady, said the inflation figures underlined the pressure on the new government to help households cope with rising living costs.

“The election showed that working people are struggling. And the biggest price rises in four years won’t provide any comfort,” she said.

“Working people are still £20 a week worse off, on average, than they were before the crash, and now rising prices are hammering their pay packets again. The new government must stop the real wage slide. Ministers must focus on delivering better-paid jobs all around the UK.”

Tim Roache, the general secretary of the GMB union, said: “Too often there is more month than money left after pay day. Ending the public sector pay freeze and making sure all workers are paid a decent wage is an absolute must and it needs to be on the agenda for the Queen’s speech.”

A Treasury spokesman said: “The government is helping families with the everyday cost of living by keeping taxes low, freezing fuel duty and increasing the ‘national living wage’.”

Inflation remains higher than the average wage growth of 2.1% year on year in the three months to March. Wage figures due on Wednesday were expected to show the gap between underlying pay growth and the inflation increase widened further in April.

The higher-than-expected inflation figure will intensify the debate over how long the Bank of England may leave interest rates at the record low of 0.25%. Inflation is well above the Bank’s 2% target, but policymakers have said they are happy to tolerate some overshoot because they want to support growth and employment as the UK prepares to begin Brexit negotiations.

The Bank’s monetary policy committee (MPC) will meet this week to set interest rates and announce its decision at noon on Thursday.

Oliver Kolodseike, a senior economist at the Centre for Economics and Business Research consultancy, said: “Under normal circumstances, the Bank of Englandwould have a sufficient set of arguments to justify an interest rate rise.

“That said, the recent rise in inflation was partly driven by external factors such as the oil price and the depreciation of the pound ... Another argument for the Bank to keep monetary policy on hold is that a rise in interest rates would increase the cost of borrowing, at a time at which consumers are already feeling a squeeze on their incomes as wage growth remains stubbornly low.

“Add to this uncertainty regarding the UK’s future outside the European Union and it seems sensible for the Bank to keep interest rates at their current levels.”

The ONS figures showed that its preferred measure of inflation, CPIH, which includes owner occupiers’ housing costs, hit a five-year high of 2.7% in May, up from 2.6% in April.

Its measure of how much manufacturers are having to pay for raw materials and energy showed that these cost pressures continued to ease off last month. Input prices increased by 11.6% in the year to May, down from a 15.6% rise in the year to April. This took pressure off companies to raise the prices they charge customers, and factory gate inflation held at 3.6% in May for the third month in a row

Jonathan Athow, the ONS deputy national statistician, said: “The rate of increase in factory gate prices has levelled now that manufacturing input costs have started to fall back.”

Paul Hollingsworth, a UK economist at consultancy Capital Economics, said this pattern supported a view that the struggling pound had fed through faster than expected, rather than by a larger amount.

“The effects of the lower pound already appear to be fading at the start of the production pipeline,” he said.

“Of course, it takes time for rises in producer prices to feed through to prices in the shops, and as a result, we think that CPI inflation will rise a bit further in the second half of the year, peaking at about 3.2% in the fourth quarter. But inflation is likely to drop back quickly in 2018 as the impact of the lower pound begins to fade.”