Consumer price inflation 2.9% higher than the same month last year, with upward pressure from fuel and clothing prices
Inflation in the UK has risen to its highest level for more than a year, putting a further squeeze on workers struggling with stagnant wages.
The rise in headline inflation to 2.9% will also pose a challenge for new Bank of England governor Mark Carney and his fellow policymakers as they look for ways to boost Britain’s fragile recovery while keeping a lid on living costs. Still, the rate was not as high as the 3% forecast by economists and was well below the 3.1% level that would have forced Carney to write an explanatory open letter to chancellor George Osborne.
Economists warned persistently high inflation would dampen optimism about Britain’s economic prospects following some recent upbeat news.
“There are growing signs of the UK recovery gaining momentum, with the economy set for strong growth in the second quarter and companies reporting the brightest outlook for the year ahead since the financial crisis struck, but inflation clearly remains the UK’s bugbear and calls into question just how long this strong growth can persist for,” said Chris Williamson, chief economist at data specialists Markit.
“High prices look set to continue to erode spending power, curbing the overall pace of economic growth.”
The Office for National Statistics said its consumer prices measure, based on a basket of goods and services, slipped 0.2% in June from May. But compared with a year ago they were up 2.9%, the highest annual inflation since April 2012. The biggest upward pressure came from petrol and diesel prices, which both rose by around a penny this June but fell in June 2012. There was also upward pressure from clothing prices after summer sales this year did not bring as many discounts as in 2012.
The retail price index measure of inflation, used as the benchmark for many pay deals, rose to 3.3% from 3.1% in May.
Both rates of inflation markedly outstrip average UK pay growth of 1.3%, meaning real wages continue to fall.
But the Treasury welcomed the fact consumer price inflation has eased from the high hit in September 2008.
A spokesman said: “Inflation is down significantly from its peak of 5.2%. At the same time, to help families with the cost of living, the government has: increased the tax-free personal allowance to £10,000, which will take 2.4 million people out of income tax altogether and save a typical basic rate taxpayer almost £600; and frozen fuel duty which has kept petrol prices 13 pence per litre lower than they would otherwise have been.”
But Labour’s shadow Treasury minister Catherine McKinnell argued that after inflation, wages are down by an average of more than £1,300 since the coalition came to power.
“With prices now rising much faster than wages the cost of living crisis is getting worse. Despite all the complacent claims from ministers about the economy, these figures show that for ordinary people life is getting harder under David Cameron’s government,” she said.
The ONS published separate data alongside the inflation showing factory gate inflation was higher than expected in June. The prices charged by manufacturers were up 2% on the year compared with forecasts for 1.9% and ewith 1.2% in May. That came as their costs, or input prices, rose an annual 4.2%, the biggest increase for more than a year.
Economists said those numbers and a rise in the core rate of consumer price inflation, which excludes erratic items such as fuel, would raise concerns among BoE policymakers about the potential for inflation to rise further still. Bank policymakers have made it clear, however, that they will take a flexible approach to inflation targeting if the broader economic picture requires it. That potentially paves the way for more quantitative easing – pumping cash into the economy by buying bonds from financial institutions – despite above-target inflation.
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