Higher services costs drive UK inflation to highest level in four years

Inflation in Britain rose at the fastest pace since June 2013 in May, remaining above the Bank of England's 2% target for the third consecutive month, after breaking through the threshold for the first time in three years in March.

According to data released by the Office for National Statistics (ONS) on Tuesday (13 June), inflation as measured by the Consumer Price Index (CPI) rose to 2.9% year-on-year last month, compared with the 2.7% growth rate recorded last month, which analysts expected to remain unchanged.

On a monthly basis, inflation rose 0.3% last month, compared with a 0.5% increase recorded in the previous month and with forecast for a 0.2% increase.

The ONS said rising prices for recreational and cultural goods and services were the main contributor to the increase. Higher electricity and food prices also contributed to drive the rate of inflation higher, offsetting a decline in fuel prices and air fares.

Meanwhile, core CPI, which measures the change in prices for retail goods and services, including food and gas, rose sharply, climbing to 2.6% from the 2.4% rate recorded last month. Analysts had expected no change.

The increase in inflation has exceeded the forecast the Bank of England issued last month, when it indicated it expected inflation would peak at 2.8% this autumn.

"Bank of England policymakers had previously said they expect inflation to peak at a little below 3% in the fourth quarter, but the evidence so far points to a sharper rise than anticipated," said Ben Brettell, senior economist at Hargreaves Lansdown.

"The balance of probability suggests the Bank will continue to 'look through' higher inflation and leave rates on hold to support the economy, but if inflation continues to surprise we could start to see members revising their positions."

The BoE will meet on Thursday to decide its fiscal policy but analysts do not expect any major changes.

Paul Hollingsworth, UK Economist at Capital Economics, added: "While we think that CPI inflation will peak at a little above 3% before the end of this year, it is likely to drop back fairly quickly in 2018.

"As a result, today's figures shouldn't worry the Monetary Policy Committee and, coupled with the ongoing political uncertainty, we expect it to unanimously vote to leave interest rates on hold at Thursday's meeting."

The latest inflation data comes only a couple of days after the pound fell by around 2% following last week's General Election, which saw Theresa May's electoral gamble spectacularly backfire.

Having called a snap-election to secure a landslide victory and strengthen her hand ahead of the Brexit negotiations, the Prime Minister fell eight seats short of achieving an overall majority and will now have to rely on Northern Ireland's Democratic Unionist Party to prop up the government.

The political turmoil saw the pound tumble below €1.13 on Monday, with traders growing increasingly worried over the lack of clarity emanating from Downing Street.

Data released tomorrow is expected to show that wage growth has grown 2.4% in the past three months, meaning households could see their spending budgets squeezed even further.