Inflation Hits Three-And-A-Half-Year High As Consumer Spending Squeezed

Inflation Hits Three-And-A-Half-Year High As Consumer Spending Squeezed

Inflation hit a three-and-half-year high last month as the Brexit-hit pound, electricity price hikes and rising air fares tightened the squeeze on consumer spending.

The Office for National Statistics (ONS) said the Consumer Price Index (CPI) measure of inflation came in above expectations at 2.7% in April, the highest rate since September 2013.

The rise keeps the rate above the Bank of England's 2% target and follows a pause at 2.3% for February and March.

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.

Sterling dropped in the wake of the announcement to sit 0.6% lower versus the euro at 1.166 and 0.1% down against the US dollar at 1.288.

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.

"The hawkish voters at the Bank of England have often talked of having 'limited tolerance' to rising prices, and today's jump in headline CPI to 2.7% from 2.3% will certainly raise a few eyebrows on the (Bank's) Monetary Policy Committee (MPC)."

The main upward impact came from air fares, which jumped by 18.6% month-on-month in April due to the impact of the Easter holidays.

Airline prices rise sharply around the Easter break, which fell on April 16 this year rather than March 27 in 2016.

The price of clothes also climbed to its highest level for six years, rising by 1.1% between March and April after falling by 0.4% a year ago.

The ONS said the timing of when shops put items on sale may have caused overall prices to push higher, with the number of discounted items falling between March and April this year after rising slightly a year ago.

Food prices also became more expensive in April, rising 0.2% month-on-month after coming in flat last year.

The cost of food has been picking up in recent months, as soaring import prices triggered by sterling's weakness outstrip the impact of the supermarket price war.

Consumers were also feeling the pinch from rising electricity prices, which picked up by 2.5% month-on-month after falling by 0.2% a year ago.

Npower and Scottish Power's decision to increase gas and electricity prices in March had an upward impact on the rate, but this was partly offset by a cap placed on prepayment meter charges by some utility companies.

Despite the price hikes, the cost of gas dropped by 0.6% over the period.

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."

The main downward pressure on CPI came from fuel pump prices, with petrol falling by 1.8p to 117.4p per litre in April and diesel also dropping by 1.8p to 120.3p per litre.

The Consumer Price Index including owner occupiers' housing costs (CPIH) hit its highest level since June 2013 at 2.6% in April, up from 2.3% in March.

CPIH is the ONS's preferred measure of inflation, which includes costs associated with living in, maintaining and owning a home.

The Retail Price Index (RPI), a separate measure of inflation which includes council tax and mortgage interest payments, reached 3.5% last month, up from 3.1% in March.