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Inflation rate soars to highest since June 2013 as households feel Brexit pinch

Economists had been expecting inflation to remain at 2.7%.

Inflation hit its highest level in nearly four years in May, with rising living costs ratcheting up the pressure on household finances in the wake of the Brexit vote.

The Office for National Statistics (ONS) said Consumer Prices Index (CPI) inflation reached 2.9% last month, up from 2.7% in April and the highest level since June 2013.

Economists had been expecting inflation to remain at 2.7%.

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The figures lay bare the squeeze on household finances as inflation outstrips wages, with CPI having been sent soaring as the Brexit-hit pound has pushed up the price of imported goods and energy.

May’s CPI surge sees inflation rise further above the Bank of England’s 2% target and will put pressure on policymakers to consider hiking rates beyond 0.25%.

Maike Currie, investment director for personal investing at Fidelity International, said: “Our real income is being squeezed and we’re witnessing this impacting UK consumer spending … This is bad news for an economy which relies on confident consumers spending on goods and services – already we are seeing signs of a stagnating economy.”

The inflation data helped the pound claw its way back from post-election losses, with sterling up 0.4% against both the US dollar and euro, at 1.27 and 1.14 respectively.

Inflation is still expected to peak at 3% later this year, according to Bank of England forecasts, but experts say CPI could climb higher.

Howard Archer, chief economic adviser to the EY Item Club, said inflation “is likely to peak at around 3.2%-3.3% in the second half of the year as sterling’s past slump is unlikely to have fully fed through yet”.

But ONS data showed the rate of increase in factory gate prices “levelled” in May as manufacturing input costs have started to fall month on month – which could provide some respite for consumer prices.

Economists believe the Bank, which announces its latest interest rates decision on Thursday, will keep the cost of borrowing on hold for some time despite surging inflation, as it looks to support the economy through Brexit uncertainty.

The economy slowed sharply at the start of 2017, with growth easing back to a paltry 0.2% in the first three months.

Rhys Herbert, Lloyds Bank Commercial Banking senior economist, said that “given other pressures, including domestic political uncertainty, interest rates still seem set to remain on hold for now”.

The ONS figures showed that the biggest upward impact on the cost of living came from recreational and cultural goods and services, which rose 0.9%, with the cost of package holidays alone rising 0.6%.

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Britons have seen the cost of foreign travel increase following the post-Brexit vote collapse of the pound, which has knocked purchasing power abroad.

The cost of games, toys and hobbies shot up 2.7% in May, due in part to a jump in computer game prices, while computer equipment also edged higher.

The ONS added that Consumer Price Index including owner occupiers’ housing costs (CPIH) rose to 2.7% from 2.6% in April, while the Retail Price Index (RPI), which includes council tax and mortgage interest payments, increased to 3.7% in May from 3.5% a month earlier.

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From Belfast Telegraph