British inflation jumps again in May, tightening squeeze on consumers

The Queen on British coins. Photo: Public Domain Pictures.

The Queen on British coins. Photo: Public Domain Pictures.

Published Jun 14, 2017

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* CPI hits 2.9 pct, highest since June 2013

* Signs of slowdown in costs surge for factories

* Sterling weakens despite CPI jump

* Weak pound pushes up costs of holidays, computers

(Adds market reaction, economist comment, graphic)

LONDON, - British inflation unexpectedly

jumped to its highest level in nearly four years in May,

tightening the squeeze on consumers who now face the added worry

of political uncertainty after last week's inconclusive

election.

The impact of the fall in the pound since last year's Brexit

vote made itself felt as the higher costs of foreign holidays

and of imported computer games and equipment helped push up

consumer prices by 2.9 percent year-on-year.

That was its biggest annual increase since June 2013, the

Office for National Statistics said, and was above the median

forecast of 2.7 percent in a Reuters poll of economists.

It is also faster than the growth in pay for most people who

have suffered a squeeze on their incomes almost without break

for a decade.

Data due to be released on Wednesday is likely to show basic

pay rose by an annual 2.0 percent in the three months to April,

according to another Reuters poll.

Prime Minister Theresa May, weakened by the loss of her

parliamentary majority in the election, has accepted that

voters' patience with austerity is at an end, the Times

reported on Tuesday.

Despite the stronger-than-expected consumer price inflation

figures, the pound fell slightly after the ONS data, possibly

reflecting a slowing of the surge in prices faced by factories

which hints at slower inflation ahead for households.

Paul Hollingsworth, an economist with Capital Economics,

said he believed the data showed the drop in the pound has fed

through into inflation more quickly than expected.

"While we think that CPI inflation will peak at a little

above 3 percent before the end of this year, it is likely to

drop back fairly quickly in 2018," he said.

The ONS said one of the main drivers for inflation in May

was the increased cost of package holidays abroad for British

tourists who have to pay more for their euros and dollars.

Another big push on prices came from computer games and

equipment, which are typically imported and therefore reflect

the diminished buying power of sterling since the Brexit vote.

Inflation has picked up speed broadly around the world but

in Britain there is extra pressure from the fall in sterling,

contributing to a sharp slowdown in British economic growth

since the start of this year.

Credit card firm Visa said on Monday it saw the first annual

fall in spending by consumers in nearly four years in May.

That was before last week's shock election result that has

raised questions about how May will advance her plans to take

Britain out of the European Union, and push other legislation.

A survey of executives published on Monday showed business

confidence plunging after the election.

FACTORY COSTS SURGE EASING

Despite the sharp rise in prices, the Bank of England is

widely expected to keep interest rates at their record low of

0.25 percent when it announces its latest monetary policy

decision on Thursday.

The BoE has said it will tolerate inflation above its target

of 2 percent because so far there has been no knock-on effect on

pay which could generate a longer-lasting inflation problem.

But the BoE had previously said it only expected inflation

to reach the kind of levels it has now hit at the end of this

year.

Some economists have said Britain's political turmoil is

likely to make the BoE more cautious about considering a rate

hike and could even lead it to revive its massive bond-buying

programme if the economy weakens further.

The BoE was also likely to take comfort from the data which

showed inflationary pressures might be easing.

Input prices for factories fell by 1.3 percent in

month-on-month terms in May, taking the yearly rate of price

growth down to 11.6 percent from a downwardly revised 15.6

percent in April, its slowest annual growth rate since last

September.

Growth in prices charged by factories held steady at an

annual 3.6 percent, in line with the Reuters poll.

Source: Reuters

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