U.K. Inflation Quickens on Record Air-Fare Increase for May

U.K. inflation accelerated more than economists forecast in May as a record jump in air fares for the month helped extend its persistence above the Bank of England’s 2 percent target.

Consumer prices rose 2.7 percent from a year earlier, compared with 2.4 percent in April, the Office for National Statistics said in London today. The median forecast of 36 economists in a Bloomberg News survey was for 2.6 percent. On the month, prices increased 0.2 percent.

Britons face a persisting squeeze in living costs as they endure inflation triple the rate of basic pay growth, which was

0.9 percent in the three months through April. Concerns on prices have prompted Bank of England policy makers to block a bid by outgoing Governor Mervyn King for more quantitative easing to aid an economy which has yet to build up momentum. Canadian Mark Carney will replace him in July.

“Inflation will probably get above 3 percent in the next month or two,” said Vicky Redwood, an economist at Capital Economics Ltd. in London. “Thereafter, it should begin a slow but steady drift down,” and so “should not prevent Mr. Carney from giving the economy more policy support in order to achieve ‘escape velocity’.”

The pound stayed lower against the dollar after the data and was trading at $1.5652 as of 10:42 a.m. London time, down

0.4 percent on the day. The yield on the benchmark 10-year U.K. government bond rose 5 basis points to 2.13 percent.

Transport Costs

Transport provided the biggest upward pressure on the inflation rate in May, as air transport and motor fuel rose from a year earlier. Air fares soared 22 percent from April, a record for the month of May. Higher clothing and footwear costs also stoked consumer prices.

Core inflation, which excludes food, alcohol, energy and tobacco, accelerated to 2.2 percent in May from 2 percent the previous month. Retail-price inflation, used in wage talks and as a basis for the inflation-linked bond market, was at 3.1 percent, up from 2.9 percent in April. Both of those numbers were the same excluding mortgage interest payments.

The squeeze on households’ cost of living has hurt U.K. retail profits. Home Retail Group Plc said June 13 it expects consumer spending to remain “subdued” this year after sales slowed at its Argos catalog chain and higher promotions at Homebase led it to cut profitability outlook for the unit.

Bond Purchases

The Bank of England held its bond purchase plan at 375 billion pounds ($588 billion) this month. Minutes of the meeting will be published tomorrow and will show whether King and two colleagues extended a push to increase stimulus by 25 billion pounds.

A majority of his colleagues have argued against that, citing the risk of dislodging consumer-price expectations. Inflation has now exceeded the 2 percent goal for 3 1/2 years.

Pipeline inflation pressures remain subdued, however. In a separate report today, the statistics office said that factory-gate prices were unchanged in May from April, and increased 1.2 percent from a year earlier.

Core output prices rose 0.1 percent on the month, while input prices fell 0.3 percent from April and rose 2.2 percent from a year earlier.

In another report, the ONS said annual U.K. house-price inflation slowed to 2.6 percent in April from 2.7 percent the previous month.

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