Business World

Tuesday 12 December 2017

UK inflation stays at two-and-a-half-year high

Getty Images
Getty Images

Philip Whiterow and Peter Cripps

UK inflation remained at a two-and-a-half-year high in May, official figures revealed today, as rising food, drink and fuel prices added to the squeeze on household spending.

The Consumer Prices Index (CPI) rate of inflation remained at 4.5pc last month, the Office for National Statistics (ONS) said.

It is the 18th month in a row that inflation has been above the Bank of England's target of 2pc, continuing the pain for cash-strapped consumers.

Upward pressure on inflation came from food prices, which rose 1.3pc between April and May, while alcohol and tobacco prices increased 0.7pc over the month, driven higher by hikes in duty and VAT.

The price motorists paid at the pumps rose to a record high of £1.36p per litre for petrol and £1.42p for diesel.

However, these inflationary pressures were largely offset by a decline in transport costs, which had been higher the previous month as airfares shot up amid the flurry of bank holidays caused by Easter and the royal wedding.

Today's announcement will keep pressure on the Bank of England to raise interest rates from their record low of 0.5pc in a bid to beat down inflation.

But any calls for a rate hike are likely to be ignored as Bank of England governor Sir Mervyn King and his fellow Monetary Policy Committee members have already said they expect inflation to peak at 5pc later this year before starting to fall back towards its target throughout 2012 and 2013.

Many economists now do not expect a rate rise before November at the earliest.

Jonathan Loynes, an economist at Capital Economics, expects further rises in food prices and future rises in gas and electricity bills "to take the headline inflation rate above 5pc, and perhaps even above 5.5pc by late summer".

However, he thinks inflation will fall back sharply next year as the impact of the VAT rise falls away. He called on the bank to hold its nerve by not raising interest rates.

The bank this week said there is little evidence that the UK is slipping into an inflationary spiral.

It is concerned that if people expect inflation to remain high, they will put more pressure on employers to raise wages, which will in turn lead to higher prices, known as a wage-prices spiral.

However, in a quarterly bulletin it reported few signs that inflation expectations have affected price or wage setting behaviour.

But today's figures reveal that the cost of many essential items in the UK continued to soar, hurting cash-strapped families whose wages have failed to rise as quickly as prices.

Food inflation was boosted by fruit, which rose by 4.7pc between April and May, with grapes showing big increases. Meat prices also rose, whereas a year ago they had fallen.

Wine and beer price hikes in the month drove up alcohol inflation, despite a fall in the cost of whisky and vodka.

Alcohol and tobacco prices were 9.8pc higher than the previous year, which is the fastest rate of increase since records began in 1997.

The cost of staying in a hotel or eating out also showed a record rise of 4.5pc year-on-year, partly as a result of January's rise in VAT to 20pc and rising food costs.

Declining transport costs were the biggest downward factor on inflation, as air fares dropped by 11.1pc and sea fares fell by 14.7pc following their Easter bounce.

The cost of furniture and household equipment also fell.

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