Inflation jumps again to hit new four-year high

USA retail sales in May recorded their biggest drop in 16 months and consumer prices unexpectedly fell month over month, suggesting inflation pressures are moderating, which could impact further Federal Reserve interest rate increases this year.

The May figure is the highest level recorded since June 2013 and was last surpassed in April 2012 when the index rose to three per cent.

Falling US gasoline prices drove inflation and retail sales down in May, defying expectations and raising more questions about the economy and the pace of interest rate increases this year. The CPI rose 0.2 per cent in April. The three categories account for about 48 per cent of the harmonised CPI basket.

There was slightly better news on the unemployment front, as the unemployment rate in the quarter through to April stood at 4.6%, compared with 5.1% in the corresponding period a year ago.

Maike Currie, investment director for personal investing at Fidelity, said: "Rising inflation and weak wage growth means United Kingdom real earnings is falling at the fastest pace in three years".

Downward pressure from airfares and motor fuel have failed to hold back inflation as it hits 2.9 per cent in the latest ONS figures, adding to disappointing United Kingdom economic data. The core CPI increased 1.7 percent year-on-year, the smallest rise since May 2015, after advancing 1.9 percent in April.

The dollar fell after the release of a weak set of U.S. data that would be disappointing for the Federal Reserve, which is expected to deliver a 25-basis point rate hike later today.

Pound GBP AUD Australian dollar UK inflation Bank of England
GETTY STOCK IMAGEGBP AUD has climbed 0.3 per cent this morning helped largely by price growth

"On the other hand, with wage growth continuing to slow and inflation still rising real pay is down on the year". Growth slowed to 0.2 percent in the first quarter, partly because of weaker consumer spending, and the UK National Institute of Economic and Social Research estimates it has not picked up so far this quarter.

Ben Brettell, Senior Economist at Hargreaves Lansdown, added: "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".

The increase in the cost of living remains well above the Bank of England's 2% target.

While it is not expected to make any change to rates, investors will scrutinise the minutes from the most recent meeting of the Monetary Policy Committee for clues about inflation.

Receipts at restaurants and bars dipped 0.1 percent, while sales at sporting goods and hobby stores fell 0.6 percent.

Consumption was one of the key drivers of the United Kingdom economy's surprise strength in the year since the referendum, prompting hasty growth revisions to forecasts from the Bank of England and other prominent economists.

  • Zachary Reyes