Why is Inflation at its Highest rate Since June 2013?

Inflation unexpectedly rose to 2.9% in May as prices increased to a four-year high, according to the Office for National Statistics (ONS). The increasing costs of ‘recreational goods’, such as games and toys, particularly computer games was one of the factors exerting upward pressure on inflation.

Computer games fall within the ‘recreational and cultural goods and services sector’, where prices increased by 0.9% between April and May this year compared with a drop of 0.4% 12 months ago. The majority of computer games are imported, and prices have been impacted by a fall in the value of Sterling.

The 2.9% figure overshot forecasts of 2.7% by analysts and 2.65% projected by the Bank of England for Q2 this year. As inflation hits its highest rate since June 2013, more household budgets are expected to be squeezed. Those living on fixed incomes, such as retirees and benefit recipients as well as individuals living on wages failing to keep pace with inflation are expected to be hit the hardest.

The high rate is also a concern for UK businesses as it squeezes margins and reduces the potential for growth through investment. Inflation has been on the up since the EU referendum, which caused the value of the Pound to plummet and pushed up the cost of imported goods. Inflation stood at 0.3%m, the month before the vote. The Bank of England’s government-set target is 2%. Economists expect inflation to rise further this year, peaking at 3.2% in Q4.

The 2.9% rate is exceeding wage growth. ONS data indicates that average weekly earnings increased by 2.1% in Q1. However, Mark Carney, Governor of the Bank of England, is optimistic that this period of negative real wage growth will be short lived. “We expect wages to pick up and real income growth to turn positive over the course of the next few years and that is during the period of leaving the EU.”

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