UK inflation figures for May show consumer prices running at their highest rate for four years, continuing to outstrip wage growth and putting further pressure on consumers. Prices for a basket of consumer goods were 2.9 percent higher in May 2017 than they were the previous year, according to numbers released by the Office for National Statistics. The rate of inflation, which was 2.7 percent in April, has been steadily increasing since 2015 but its impact on consumers has been accentuated since the Brexit vote caused the value of the pound to fall by around 15 percent against the dollar. ONS figures indicate that last month’s rise was driven by recreational goods and services like games, toys and hobbies, and to a lesser extent by higher food and electricity prices. Partially offsetting these increases were falls in the price of petrol, diesel and airfares. The consumer price index excludes costs associated with owning and maintaining a home such as changes in the rate of council tax, which has to be paid by anybody who owns or rents a house. Another index, known as the CPIH, which does include these factors and therefore gives a more complete picture of the inflation rate, hit 2.7 percent in May, the highest rate since April 2012.
The double effect of the pound’s lower purchasing power and rising prices is beginning to squeeze consumers who haven’t seen their pay rises keep up with the rate of inflation. Figures released by the ONS last month showed that in the first three months of the year average wages, excluding bonuses, fell by 0.2 percent. The knock on effect of higher prices and lower wages is beginning to be reflected in consumer spending which saw a 1.9 percent drop in May compared to April. Retail sales for the first quarter of 2017 saw their biggest fall since 2010. Responding to the consumer spending results, Annabel Fiddes, Economist at IHS Markit said: “The squeeze on household finances is likely to get worse as the Bank of England forecasts faster increases in consumer prices in the coming months. Combined with relatively low levels of consumer confidence, uncertainty around the outcome of Brexit and a slowdown in UK economic growth, it’s likely we will continue to see weaker expenditure trends at least in the near-term.”