United Kingdom inflation rises more than expected but pound pulls back from highs

Barsaba Taglieri
Mag 17, 2017

In April past year it stood at just 0.3%. This was above consensus expectations of an increase to 2.6% and the highest annual CPI inflation reading since June 2013.

Businesses are under similar pressure after more figures showed the cost of raw materials jumping 16.6% on past year thanks to the pound's fall, although, so far, factory gate prices have risen just 3.6%.

Core inflation, which excludes food and energy, was 2.4 per cent last month.

The Bank said in its inflation report on Thursday that CPI would peak at 3% later this year, as the pound's slump following the Brexit vote causes price tags on everyday items to tick higher.

Kay Daniel Neufeld, economist at the Centre for Economics and Business Research, said the rise in prices poses a serious challenge to United Kingdom households.

Nonetheless, the central bank's Monetary Policy Committee expects inflation to rise further over the rest of the year, peaking at just below 3% in the fourth quarter, well ahead of its preferred target of 2%.

He added: "However, there is an upside to the weaker pound and its inflationary impact: our exports become more competitive in overseas markets".

The cost of living was 2.4 per cent higher in March than in the same month of 2016, according to the Consumer Price Index published by the Department of Statistics today.

Clothing and electricity prices also rose at a faster rate during April while changes to certain auto taxes also helped to push up the rate of inflation.

"We should expect this rise in inflation to continue as the impact of the weakness if the pound feeds through into higher prices for imported goods and services". Real income levels of British households have come under strain this year as living costs have risen more sharply than wages.

Increased air fares were highlighted as a key driver of inflation, with the late Easter holiday pushing up prices during April. Under the old series, wholesale inflation in March stood at 5.7 per cent.

The Bank of England weakened the pound last week by cutting its forecasts for the United Kingdom economy and pushing out its assumption for when it will raise rates to the end of 2019 - assuming Britain's exit from the European Union goes smoothly.

Higher inflation tends to put pressure on the Bank to raise interest rates in order to keep it under control, though this is seen as unlikely at the moment given the uncertainty facing the economy amid the Brexit process.

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