Higher holiday prices help inflation climb to near four-year high

Inflation climbed to a near four-year high of 2.9% in May, up from 2.7% the month before, according to official figures.

The higher than expected increase in the cost of living adds to the squeeze on households with wages climbing at a much weaker 2.1%, according to most recent data.

Inflation has been accelerating largely thanks to the collapse in the pound following the Brexit vote, which makes imported goods more expensive.

The Office for National Statistics (ONS) said the main upward pressure in May came from “recreational and cultural” goods and services, particularly games, toys and hobbies, as well as package holidays.

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A rise in the cost of package holidays has helped drive inflation higher

Holidays are becoming more expensive for UK tourists travelling abroad because of the weak pound.

Increased food and electricity prices – following hikes by major energy suppliers – also made a contribution – as did children’s clothing.

Falls in motor fuel and air and sea fares had a downward effect, the ONS added.

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Higher prices for toys contributed to rising inflation

The increase in the Consumer Price Index (CPI) measure of inflation left it at its highest level since June 2013. It has not been higher since April 2012.

Economists had expected CPI inflation to remain at 2.7% in May.

Inflation in four key categories – food and non-alcoholic beverages, clothing and footwear, furniture and household goods, and recreation and culture – was at its highest since 2013 or earlier.

Wages are already falling in real terms – that is, when accounting for inflation – and official statistics published on Wednesday are expected to show this has continued.

Bank of England governor Mark Carney warned last month that this year would see a “more challenging time for British households”.

Credit card firm Visa said on Monday that it saw the first annual spending by consumers in nearly four years in May.

Inflation has been rising sharply in recent months having been hovering at close to zero until early in 2016. In May last year it stood at just 0.3%.

Earlier this year, the Bank forecast that CPI would reach 2.8% by the end of the year but the latest figures show it has already exceeded that.

But despite the sharp uptick in inflation, it is expected to leave interest rates on hold at 0.25% later this week – with some experts speculating that increased political uncertainty after the election would add to caution about any hike.

Other data released by the ONS on Tuesday suggested inflationary pressures further down the track might be easing – with prices paid by factories up by 11.6% year-on-year, down from 15.6% in April.

The Resolution Foundation, a think-tank, said: “Rising inflation means Britain is set for a longer, deeper pay squeeze.”

But Paul Hollingsworth, UK economist at Capital Economics, said inflation was “now not far away from its peak” and was likely to edge above 3% before falling again.

Meanwhile separate figures showed house prices also on the up, increasing 5.6% in the year to April – up from 4.5% in the year to March.


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