Sterling falls as inflation rises faster than expected in April with higher prices set to drag on real wages

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The price of a basket of goods has been driven up by the fall in the value of sterling (Source: Getty)

Inflation rose sharply in April as price rises continued to drag on the British consumer at the highest rate since September 2013.

The consumer price index, the measure used by the Bank of England, increased at an annual rate of 2.7 per cent in April, up from the 2.3 per cent seen in March, according to the Office for National Statistics (ONS).

Economists had expected consumer price index inflation to jump further above target to a consensus of around 2.6 per cent.

The pound failed to build on a small rally against the US dollar before the data was released, despite briefly spiking to $1.2958. It fell to lows of $1.2866 after the announcement.

Read more: Bank of England holds: Real wage fall prompts growth forecast downgrade

Meanwhile the consumer price index including owner occupiers’ housing costs, which the ONS has designated as its main measure, rose to 2.6 per cent.

The Bank of England now expects real wages to fall this year as inflation outpaces pay increases.

Stephen Boyle, chief economist at Royal Bank of Scotland, said: “Rising inflation is the major economic story of 2017. While it is by no means a return to the bad old days of the 1970s, when inflation reached 27%, or even the 1990s, when it averaged over 3%, higher inflation matters.

"Wages are growing by around two per cent year-on-year, which means that 2.7 per cent inflation is eroding our spending power."

The fall in the value of the pound since the EU referendum has driven the rapid rise in prices. Sterling crashed to its lowest level against the US dollar in more than three decades in the aftermath of the vote.

However, a recent rebound in the value of the pound to just below $1.30 against the dollar has slightly cushioned the blow. The pound was trading around 14 per cent below pre-referendum highs just before the inflation data was released.

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The recent rebound prompted the Bank of England to predict inflation will peak earlier, which the latest data appear to have borne out.

The producer price index (PPI), which measures the price of goods at the factory gate, rose by 3.6 per cent, the same pace as seen in March.

Higher factory gate prices are generally passed on to consumers, although some of the increase is also absorbed in company margins. Stalling factory gate prices may mean momentum in the rise of consumer inflation could also slow.

Input prices rises also slowed to a 16.6 per cent annual rate of increase, compared to almost 20 per cent increases at the start of the year.

Read more: Inflation stuck at its highest since 2013 in March

Nevertheless, the rise in inflation will add further pressure on the monetary policymakers at the Bank, who have determinedly maintained a looser grip on the supply of money, with interest rates remaining at historically low levels.

The Bank has had to contend with inflation rising well beyond its target level of two per cent. It has already upped its forecasts from previous levels, with it now expecting inflation to peak just below three per cent by the end of the year.

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