Squeeze tightens on UK households as inflation hits 2.7%

UK consumer price inflation jumped to a three-and-a-half-year high of 2.7% in April, furthering the squeeze on British households as prices rose faster than annual average earnings growth.

The rise in CPI, from 2.3% in March – which was unchanged from February – takes the rate of inflation further above the Bank of England's 2% target.

Easter effect

Analysts said a major contributing factor to the sharp rise was likely the late Easter – also a key element behind the unchanged reading in March.

In its Quarterly Inflation Report last week, the Bank of England (BoE) raised its forecasts for UK inflation. The central bank said it expected CPI to peak at 2.8% in the fourth quarter.

Bank of England governor Mark Carney: BoE expects CPI to peak at 2.8% in Q4 - source: Bank of England

At the same time, however, the BoE said it did not believe inflation was being underpinned by strong growth and it revised lower its projections for annual gross domestic product over the next three years.

Pound falls

Expectations for near-term interest rate increases remained muted, therefore, and the pound fell following the inflation data, down 0.2% against the dollar at $1.2877 and off 0.7% to €1.1671 versus the euro.

"The fact that sterling fell against the euro in the aftermath of the announcement shows that a stagnant rate environment is well priced in," said Richard Berry at BerryFX.

Howard Archer at IHS Markit agreed: "We maintain the view that the Bank of England will most likely sit tight on interest rates through 2017 and 2018 – and very possibly well beyond."

Households squeezed

Transport and clothing prices increased during March and April, the data showed, with air fares and vehicle road tax among the biggest contributing factors. Meanwhile, electricity bills increased as six utility providers put up their prices.

Indeed, households are feeling the squeeze on their spending power tighten. While CPI stood at 2.7% in April, annual average wage growth stood at just 2.3% in the three months to the end of February

"Retailers, manufacturers, and services companies will find the upside to their pricing power limited, given that the previous prolonged squeeze on households’ purchasing power has made consumers very price conscious," added Archer.

The retail price index, which includes petrol prices, mortgage payments and council tax – items stripped out of the CPI measure of inflation – rose to 3.5% in April, up from 3.1% in March.