British inflation rate rises to 4-year high as Brexit bites

By DANICA KIRKA Markets Associated Press

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.

Continue Reading Below

The Office for National Statistics said Tuesday that consumer prices were up 2.9 percent on the year in May, from 2.7 percent in April. That was mainly due to rising prices for recreational and cultural goods and services, such as games, toys and hobbies.

Inflation has been rising steadily in recent months, as the drop in the pound — by as much as a fifth against the dollar since Britain voted in June last year to leave the European Union — makes imports more expensive.

"The further increase in inflation — to its highest rate since June 2013 — primarily reflects retailers passing on higher import prices to consumers in earnest," said Samuel Tombs, the chief U.K. economist at Pantheon Macroeconomics.

The increases were partially offset by falls in motor fuel prices, as well as air and sea fares, which were influenced by the timing of Easter in April this year.

The increase comes as a surprise to many analysts, who had on average been expecting the rate to remain steady at 2.7 percent in May.

Continue Reading Below

It will also be unwelcome news to the Bank of England, which tries to keep inflation close to 2 percent. The central bank faces the dilemma of supporting a weakening economy or pushing rates higher to combat rising inflation. On balance, most economists do not expect the Bank of England policymakers to raise rates from their record low of 0.25 percent this week amid fears of a shock to the economy from Brexit negotiations.

"The general mood on the economy has become one of caution over the past few weeks, with first-quarter GDP figures disappointing, consumer spending looking weaker and Brexit-related uncertainty looming large," said Ben Brettell, senior economist at Hargreaves Lansdown. "However, growth is expected to pick up somewhat in the second quarter, and it looks like the election result could make for a 'softer' Brexit, which could prove positive for the economy."