Inflation rise puts the squeeze on United Kingdom household spending

Reflecting a steep drop in energy prices, the Labor Department released a report on Wednesday showing a modest decrease in US consumer prices in the month of May.

The consumer price index (CPI) measure of inflation hit its highest level since June 2013, largely as a result of a sharp increase in recreational and cultural goods and services: a sector that includes foreign holidays, the prices of which have risen sharply as a result of the fall in sterling's value since last year's European Union referendum.

Rising prices for recreational and cultural goods and services were cited as the main reason for the latest inflation increase, with the fall in value of the pound continuing to result in more expensive imports.

The inflation rate in Britain has risen to its highest level in four years, as the drop in the pound since the Brexit vote pushes up the cost of living.

Hollingsworth said that the rise in price pressures at the start of the supply chain was slowing. The BOE targets a 2 percent rate.

The Fed also issued updated economic forecasts that showed it foresees one additional rate increase this year to follow Wednesday's increase and an earlier rate hike in March.

The euro EUR= rose to its highest since November 9 against the dollar, hitting $1.1295.

Nevertheless, James Bohnaker of IHS Markit said seasonal factors likely exaggerated the effect of falling energy prices on overall inflation because gasoline prices typically rise in the spring, ahead of the United States driving season.

The Fed is expected to increase borrowing costs later on Wednesday, but the signs of moderate consumer spending and retreating inflation pressures could worry policymakers who have previously viewed the softness as transitory.

British households are turning increasingly cautious about their spending due to the mix of low wage growth and rising inflation. Sales at building material stores were unchanged, while receipts at clothing stores rose 0.3 percent. Many business and consumer loans are tied to changes in fed funds, though many rates are still quite low.

"The evidence so far points to a sharper rise than anticipated", he said.

Inflation hit its highest level in May since June 2013, with rising living costs ratcheting up the pressure on household finances in the wake of the Brexit vote.

Core inflation that excludes energy, food, alcoholic beverages and tobacco increased to 2.6 percent from 2.4 percent in April. The consumer price index dropped 0.1 percent month-on-month.

In addition, the retail price index (RPI) rose by 3.7% last month, after increasing by 3.5% the previous month.

Unemployment remains at 4.6 per cent, its joint lowest since 1975, while the employment rate stayed at a record high of 74.8 per cent, the ONS reported.

  • Zachary Reyes