Inflation rise bigger than expected

Plane in Newcastle

The squeeze on consumers intensified last month as soaring air fares and more expensive clothing and footwear lifted inflation higher than expected.

Consumer Prices Index (CPI) inflation climbed to 2.7% in May, from 2.4% in April, the Office for National Statistics (ONS) said. But 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 (BCC), 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 (QE) 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.

© 2013 Press Association
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