British inflation sees sharp rise in May

Tuesday 18 June 2013 12.33
Economists expect inflation to peak at 3% in the coming months before falling slowly
Economists expect inflation to peak at 3% in the coming months before falling slowly

British inflation rose higher than expected last month as a result of soaring air fares and more expensive clothing and footwear.

Consumer Prices Index inflation climbed to 2.7% in May, from 2.4% in April, the country’s Office for National Statistics said.

However while inflation is expected to peak at about 3% in coming months, economists believe it will then begin a "slow but steady" drift down.

Last month's surge in inflation was higher than forecasts for a 2.6% reading, as price rises rebounded after a sharp fall in inflation in April.

Inflation remains stubbornly above the Bank of England's 2% target - which it has not hit since late 2009 - far outstripping wage rises and further eroding consumers' spending power and savings.

Average earnings increased by just 1.3% in the year to April and 0.7% on the previous month, the ONS said recently, as salaries struggle to keep pace with price hikes.

Air fares leapt 22% from April - the highest rate of increase for this time of year since records began in 2001.

Prices rose across European, long-haul and domestic flights, the ONS said, adding there was no clear link to the early timing of the Easter holidays.

Overall transport prices rose by 0.4% between April and May, the ONS added, as price falls for petrol and diesel slowed to 2.2% month-on-month, compared with a 3.1% fall a year earlier.

The price of clothing and footwear also rose 1.2% month on month, as the cost of women's outdoor clothing increased during a colder-than-normal month.

There were also price rises for furniture, carpets and garden tools.

But food and drink prices helped hold back inflation, with price falls for meat, vegetables, fruit, sugar, sweets and jams.

David Kern, chief economist at the British Chambers of Commerce said: "With earnings growth stagnant, the rise in inflation will put pressure on businesses and consumers."

Neil Prothero, analyst at The Economist Intelligence Unit, added the protracted decline in average real wages, now in its fifth consecutive year, will "persist for some time to come."

But despite May's inflation rebound, economists believe future price rises will be more restrained than originally feared, giving the Bank greater scope to resume pumping money into the economy.

The Bank now expects inflation to hit a summer peak of about 3%, down from earlier fears of a 3.5% peak, held back by weaker commodity prices.

Vicky Redwood, economist at Capital Economics, said that while higher than expected, inflation's peak is "hopefully not too far away now".

She said: "Inflation will probably get above 3% in the next month or two - meaning that one of [new Bank governor Mark] Carney's first jobs will be to write an explanatory letter to the Chancellor."

The figures come ahead of minutes due this week from the Bank's June interest rates meeting - the last meeting for outgoing governor Sir Mervyn King - which will reveal the level of support for more economic stimulus.

The Bank's Monetary Policy Committee voted to hold its quantitative easing programme steady at £375 billion this month, also keeping rates at 0.5%, amid signs of improvement in the economy.

The Bank is expected to hold off more QE until the arrival of Mr Carney next month.

Today's figures also showed Retail Prices Index inflation, which includes housing costs, rose to 3.1% in May, from 2.9% in April.

Recently-launched experimental measures of inflation - CPIH, including housing costs, and RPIJ, which was created to iron out the gap formed by the different methods of calculating the price of goods, both rose to 2.5% in May.

The Treasury said CPI inflation is down by almost a half from its peak of 5.2% in September 2011.

A spokeswoman said: "To help families with the cost of living, the Government has increased the tax-free personal allowance to £10,000, which will take 2.7 million people out of income tax altogether and save a typical taxpayer over £700.

"(It has) frozen fuel duty which has kept petrol prices 13p per litre lower than they would otherwise have been."

But TUC general secretary Frances O'Grady said Britain is set for a "joyless" recovery.

She said: "Britain's great wage squeeze shows no sign of abating.

"Forty consecutive months of real wage falls mean people have less to spend on the high street, and are why economic green shoots are not being felt across the country."

None of the UK's 820 standard savings accounts pays enough interest to negate tax and inflation, compared with more than 200 a year earlier, figures from price comparison website Moneyfacts.co.uk showed.

It said a basic rate taxpayer would need to earn 3.38% interest on savings to beat inflation.

Sylvia Waycot, editor at Moneyfacts.co.uk, added: "It's bad enough that today's rise in inflation will reduce the spending power of the pound in our pockets, but the miserable returns on savings accounts mean there are few pounds in our pockets to start off with.

"Savers will be horrified to know that there are no standard savings accounts that beat or match the rate of inflation."