Rising inflation poses '˜serious challenge' to UK households

Inflation hit its highest level in nearly four years last month as the Brexit-hit pound, electricity price hikes and rising air fares tightened the squeeze on consumer spending.

CPI is expected to peak at 3% this year said the Banks inflation report
CPI is expected to peak at 3% this year said the Banks inflation report

The Office for National Statistics (ONS) said the Consumer Price Index (CPI) measure of inflation rose to 2.7% in April, above economist predictions of 2.6%.

CPI has not reached 2.7% since September 2013 and was last higher in July 2013 at 2.8%.

It means inflation is now outstripping wage growth, which rose by 2.3% in the year to February.

Kay Daniel Neufeld, economist at the Centre for Economics and Business Research (Cebr), said the jump in the cost of living poses “a serious challenge to UK households”.

He added: “Wage data are due later this week and are expected to show that real wage growth has turned negative in the first months of 2017.

“Consumer spending has already slowed, as evidenced by weak retail sales growth in the first quarter of this year, and is expected to suffer further from low wage growth and higher inflation.

“This means that the UK economy is losing considerable momentum which as of yet has not been offset by stronger exports.”

April’s rise keeps inflation above the Bank of England’s 2% target and follows a pause in February and March when CPI stood at 2.3%.

Sterling dropped in the wake of the announcement, but was flat against the US dollar at 1.289 in afternoon trading and 0.8% lower versus the euro at 1.165.

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.

ING economist James Smith said the above-consensus rise will “test the patience of some of the Bank of England’s hawks”, but expects interest rates to remain on hold for the next two years.

He said: “We think a household spending squeeze and elevated Brexit uncertainty mean we won’t see rate hikes until 2019.”