United Kingdom unemployment stays at lowest since 1975

Economists were shocked after expecting inflation to remain at 2.7%, but the Brexit-hit Pound pushed up the price of imported goods and energy.

Consumer prices edged down 0.1 per cent last month following a small 0.2 per cent increase in April, the Labor Department reported Wednesday.

The retail data, along with May inflation data, give the Federal Reserve the most up-to-date picture of the economy as policymakers finalize their expected decision to hike the central bank's key interest rate on Wednesday and provide guidance about future policy.

"It won't stop the Fed from hiking interest rates later today, but it increases the downside risks to our forecast that there will be a further two rate hikes in the second half of this year", said Paul Ashworth, chief US economist at Capital Economics in Toronto.

Shelter costs-which account for about a third of the overall price index-increased 0.2% on the month and rose 3.3% on the year.

INFLATION hit its highest level in four years last month as the rising cost of foreign holidays and the weak sterling continues to put a squeeze on the cost of living.

This eased inflation on a year-on-year basis to 1.9 percent and thereby marks the first reading below 2 percent since November 2016.

Given the reliance on the services sector in the United Kingdom, this also has profound implications for economic growth.

The inflation data helped the pound claw its way back from post-election losses, with sterling up 0.4% against both the U.S. dollar and euro, at 1.27 and 1.14 respectively.

Rising inflation has been a boon for the discount supermarkets Aldi and Lidl, whose combined sales have risen by nearly 20 per cent over the past three months, compared to the same period previous year.

Michael Baxter, economics commentator for The Share Centre, warned the United Kingdom is suffering a "double blow" in that inflation is rising due to higher commodity prices - not dissimilar to what is happening in the USA and the Eurozone - but has been put under extra pressure by the fall in sterling.

The BLS noted that a 2.7% decrease in the energy index was the main contributor to the monthly fall. Holders of Treasury Inflation-Protected Securities and I Bonds are also interested in non-seasonally adjusted inflation, which is used to adjust the principal balances on TIPS and set future interest rates for I Bonds.

'We are maintaining our underweight to United Kingdom equities and increasing exposure to defensive large caps using the Fidelity Money Builder Dividend fund at the expense of cyclicals and mid-cap stocks, ' he added.

Ben Brettell, senior economist at Hargreaves Lansdown, said that while unemployment remains at a multi-decade low of 4.6%, the squeeze on household finances is worse than previously thought.

That said, Baxter said there could be another currency-related jump in inflation a few months down the line if this fall in currency doesn't reverse.

Economists polled by Reuters had forecast the CPI unchanged last month and advancing 2.0 per cent from a year ago. But Fed officials have said they think inflation will soon pick up along with the economy.

  • Zachary Reyes