Yahoo Finance Energy price rises help drive UK inflation up to 2.7%
The rising cost of electricity contributed to inflation’s rise to 2.7% in April, its highest level in three and a half years.
Increases in the cost of clothing, car tax and air fares were also blamed by the Office for National Statistics for the rise in consumer price inflation (CPI) that exceeded City forecasts of 2.6%, and soared above the previous month’s figure of 2.3%.
With wages increasing by just 1.9%, opposition parties and the TUC said the new inflation figure highlighted the growing pressure on living standards and consumer spending.
The economy has grown over the last two years in response to a surge in consumer spending, fuelled largely by an increase in credit.
But the fall in the value of sterling following the Brexit vote has pushed up the prices of imports, especially of food and clothing. The Bank of England predicted last week that inflation would peak at 2.7% in the summer. However, this forecast looks like it will need to be revised, especially after the ONS said producer output price inflation was above 3%, indicating that further rises in inflation could be expected.
Liberal Democrat shadow business secretary Susan Kramer said: “These worrying levels of inflation show the Brexit squeeze is hitting shopping baskets across the country.”
The TUC general secretary, Frances O’Grady, said the government needed to protect workers from a slump in real wages. “Working people are still £20 a week worse off, on average, than they were before the crash. That’s why living standards must be a key battleground at this election,” she said.
“All the parties need to explain how they’ll create better-paid jobs, especially in the parts of the UK that need them most.”
City economists were divided over the path of inflation over the next year, with some expecting a modest and brief rise above 3% while others said it would be more sustained.
Alan Clarke, an economist at Scotia Bank, said he expected further electricity and gas price rises and that an acceleration in food price rises would push CPI inflation to 3.25% in the autumn.
“We remain convinced that the market is underestimating the further upside for inflation from here,” he said.
Clarke argued that the retail prices index (RPI), which includes some housing costs, was already at 3.5% and would rise to 4.25% before the end of the year, putting extreme pressure on consumers to cut back spending on non-essential items.
The National Institute for Economic & Social Research (NIESR) forecast last week that British workers will see their disposable incomes shrinking this year as a result of rising inflation that will peak at 3.4%, while average wage rises are capped at only 2.7%.
Howard Archer, chief UK economist at IHS Global Insight, said rising inflation would put a further squeeze on real incomes and force Threadneedle Street to delay any move to raise interest rates.
“The Bank of England will most likely sit tight on interest rates through 2017 and 2018 – and very possibly well beyond.
“We suspect it will end up remaining tolerant on the inflation overshoot given likely limited UK growth and the prolonged, highly uncertain outlook that the UK economy will face as the government negotiates the exit from the EU,” he said.
But Scott Bowman, UK economist at Capital Economics, was more optimistic that inflation would be held in check. He said many of the elements pushing up inflation were one-off factors and their effect would wane over the coming months.
“The sharp rise was mainly due to factors that, while they won’t be reversed, shouldn’t be repeated. Indeed, a large part of the rise in inflation reflected air fares reversing the previous month’s fall as a result of Easter shifting from March last year to April this year.
“What’s more, vehicle excise duty rates rose this April and tobacco and alcohol duty increased by more this year than they did last year,” he said.
