Tue | Oct 17, 2017

British inflation rate rises to four-year high as Brexit bites

Published:Tuesday | June 13, 2017 | 11:36 AMAP

 

The inflation rate in the United Kingdom has risen to its highest level in four years, as the drop in the pound since the Brexit vote pushes up the cost of living.

The Office for National Statistics said Tuesday that consumer prices were up 2.9 per cent on the year in May, from 2.7 per cent in April. That was mainly due to rising prices for recreational and cultural goods and services, such as games, toys and hobbies.

Inflation has been rising steadily in recent months, as the drop in the pound — by as much as a fifth against the dollar since the UK voted in June last year to leave the European Union — makes imports more expensive.

"The further increase in inflation — to its highest rate since June 2013 — primarily reflects retailers passing on higher import prices to consumers in earnest," said Samuel Tombs, the chief United Kingdom economist at Pantheon Macroeconomics.

The increases were partially offset by falls in motor fuel prices, as well as air and sea fares, which were influenced by the timing of Easter in April this year.

The increase comes as a surprise to many analysts, who had on average been expecting the rate to remain steady at 2.7 per cent in May.

It will also be unwelcome news to the Bank of England, which tries to keep inflation close to 2 per cent. The central bank faces the dilemma of supporting a weakening economy or pushing rates higher to combat rising inflation. On balance, most economists do not expect the Bank of England policymakers to raise rates from their record low of 0.25 per cent this week amid fears of a shock to the economy from Brexit negotiations.

"The general mood on the economy has become one of caution over the past few weeks, with first-quarter GDP figures disappointing, consumer spending looking weaker and Brexit-related uncertainty looming large," said Ben Brettell, senior economist at Hargreaves Lansdown.

"However, growth is expected to pick up somewhat in the second quarter, and it looks like the election result could make for a 'softer' Brexit, which could prove positive for the economy," he said.