Inflation jumps to hit four-year high of 2.9 per cent

Jasper Jolly
Follow Jasper
The price of a basket of goods has surged in the past year (Source: Getty)

Inflation rose faster than expected in May to reach its joint highest level since April 2012, with the consumer price index (CPI) rising by 2.9 per cent over the past year.

Economists had predicted inflation would stay steady at the 2.7 per cent rate recorded last month, but rising prices of recreational and cultural goods and services drove the overall index higher, according to the Office for National Statistics (ONS).

The rise puts further pressure on the Bank of England ahead of its latest monetary policy meeting tomorrow. The Bank has remained determined to keep interest rates on hold in the near term, but its forecasts of the path for interest rates remain conditioned on the assumption inflation will peak below three per cent later this year.

Read more: Consumer spending dips for first time in almost four years

However, the Bank is also conscious of the effects of rising inflation on growth. Faster price increases have outstripped earnings in the past year, with considerable evidence building that higher inflation is weighing on consumer spending, a key driver of growth.

In the year to March regular pay increased by only 2.1 per cent, meaning real wages fell. Only a year ago the annual rate of inflation was as low as 0.3 per cent, meaning anaemic wage growth still outpaced cost increases.

The effects of the devaluation of sterling since the UK voted for Brexit have driven the sharp rise in consumer prices over the past year, putting paid to real wage growth.

Read more: Sterling rises as central banks wrestle with car-crash politics

Sterling remains around 15 per cent less valuable than at its pre-EU referendum peak, meaning foreign goods are more expensive and the price of imported inputs for domestic production is also markedly higher.

Despite the continued surge in consumer prices the Bank of England's rate-setting monetary policy committee (MPC) is unlikely to act to tighten the supply of money to the economy at Thursday's announcement – and indeed until domestically generated inflation pressures start to build up.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: "Looking ahead, CPI inflation still looks set to rise to a peak of about 3.2 per cent in the fourth quarter – exceeding the MPC’s 2.8 per cent forecast – as retailers continue to pass on higher import prices to consumers.

"We doubt, however, that a majority of MPC members will feel compelled to raise interest rates this year. Wage growth and inflation expectations remain consistent with CPI inflation falling back to the two per cent target in late 2018, once the import price shock has passed."

The ONS's preferred measure of inflation, the consumer prices index including housing costs (CPIH), rose to 2.7 per cent.

Sterling edged up against the US dollar after the announcement after rising in morning trading. It was trading above $1.27 at the time of writing.

Related articles