Inflation in the United Kingdom has hit a near four-year high as the Brexit-weakened pound filters through the economy.
But the pound recovered some of the losses it suffered in the wake of last week’s general election, as rising inflation signals the Bank of England will not raise interest rates.
The rising cost of living puts a squeeze on consumers, who are already facing further political uncertainty due to the result of last week’s general election in which the Conservatives failed to win an overall majority.
That’s bad news for businesses here selling into the UK market.
But it also adds to pressure on the Bank of England, even if it does not raise interest rates over the next three years, to hold off with any more injections of cash into the economy for fear further weakness of the pound and higher inflation.
“Under normal circumstances the Bank of England would probably have a bit of leeway to raise interest rates.
“But given the political uncertainty, especially surrounding the Brexit negotiations and the hung parliament, but also the slower GDP growth that we saw in Q1, that will probably deter an interest rate rise anytime soon,” senior economist Oliver Kolodseike of the London-based Centre for Economics and Business Research (CEBR) told the Irish Independent.
Sterling dipped back under 88 pence against the euro yesterday. The impact of the fall in the pound since last year’s Brexit vote made itself felt as the higher costs of foreign holidays and of imported computer games and equipment helped push up consumer prices by 2.9pc year-on-year.
That was its biggest annual increase since June 2013, the Office for National Statistics said.
Rising costs will do little to boost consumer confidence, and data due out today is expected to show that wage growth isn’t keeping pace with inflation.
The ONS figures come just a day after data showed that consumer spending in the UK fell for the first time in almost four years last month, signalling shoppers are growing more cautious and adding to fears that the economy there is cooling.
If British shoppers buy less, buffeted as they are by rising inflation, that’s bad news for Irish exporters selling their wares into the UK market.
Brexit has already had an impact, as goods exports plummeted by almost half a billion euro last year, on the back of the Brexit-induced weakness in the pound.
Sterling weakened again after last week’s inconclusive election result and businesses have said the election result risks paralysing the government at a time when it is meant to be negotiating a smooth exit from the EU.
Mr Kolodseike said that while the pound did recover slightly on the back of the inflation data, it could see-saw over the short term until a new UK government is formed.
“The Fed is meeting [today} and if the federal reserve decides to rise interest rates, which is widely expected, that could strengthen the dollar and weaken the pound further. So they are all factors that factor into the equation, but once there is a bit more clarity on the government and Brexit negotiations, then we expect the pound to strengthen a little bit, but until then, there could still be a bit of volatility.”
Paul Hollingsworth, an economist with Capital Economics, said he believed the data showed the drop in the pound has fed through into inflation more quickly than expected