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Inflation jumps to four-year high of 2.9%

Inflation rose faster than expected in May, as a lower fuel price failed to offset increases in the cost of energy, food and package holidays.

Inflation jumps to four-year high of 2.9%

UK inflation reached a four-year high of 2.9% in May, driven in part by the growing costs of international package holidays.

Figures from the Office for National Statistics (ONS) revealed the consumer prices index rose by 0.2% during the month, showing a steady upward trend since the UK voted in favour of leaving the European Union last June.

Over the past two months alone, CPI has risen by 0.6%.

The ONS attributed the inflationary increase in May to a 0.9% rise in recreational and cultural goods and services. This category includes computer games and equipment, hobbies and package holidays. The rise in this category compares to a 0.4% fall a year ago.

Food pricing increased slightly in May, having fallen 12 months ago, with sugar, jam, chocolate and confectionery experiencing increases.

Likewise, clothing and footwear prices rose by 0.5% during the month, largely driven by children's clothing.

Although the price of fuel fell during May, it failed to offset higher prices for energy, food and recreational goods.

When occupiers’ housing costs are factored into CPI, 12-month inflation stood at 2.7% in May, up 0.1% over the month.

Economists had expected May’s CPI to come in at 2.7% and the higher than expected inflation figure shows that households are feeling the pinch because wages are growing at a lower rate of 2.1%, according to data from the first quarter of 2017.

‘Bank of England policymakers had previously said they expect inflation to peak at a little below 3% in the fourth quarter, but the evidence so far points to a sharper rise than anticipated,’ commented Ben Brettell, senior economist at investment broker Hargreaves Lansdown.

Kristin Forbes has been the only member of the Bank of England’s monetary policy committee who has voted in favour of higher interest rates, and she is due to leave the committee next month.

With this in mind, Brettell concluded: ‘The balance of probability suggests the Bank will continue to “look through” higher inflation and leave rates on hold to support the economy, but if inflation continues to surprise we could start to see members revising their positions.’

Although the headline inflation figure has risen once again, Architas investment manager Nathan Sweeney, thinks inflation may have finally reached its peak.

‘Hitting its highest level since June 2013 was a surprise but it seems much of the inflationary pressure in the system has now been washed through,’ he said.

As the UK now faces a hung parliament, Sweeney does not expect the MPC raise interest rates when it meets this week.

The investment manager is conscious of the potential impact of higher inflation on consumer confidence and is therefore cautious on consumer-facing sectors.

‘We are maintaining our underweight to UK equities and increasing exposure to defensive large caps using the Fidelity Money Builder Dividend fund at the expense of cyclicals and mid-cap stocks,’ he added.


1 comment so far. Why not have your say?

William Phillips

Jun 14, 2017 at 11:46

Yet again you have failed to report the change in the Retail Prices Index.

Don't you understand how many of your readers are pensioners or holders of index-linked stock, with a direct interest in a more honest measure of inflation than the CPI?

Are you government stooges?

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