May 16, 2017 / 8:35 AM / 2 months ago

Inflation tightens screw on UK consumers as election nears

LONDON (Reuters) - British inflation hit its highest level since September 2013 last month, extending its sharp rise since the vote to leave the European Union and tightening the squeeze on living costs as a national election approaches.

Consumer prices rose by an annual 2.7 percent, data showed, and they look set to rise further due to the fall in the value of the pound and the recent rise in global oil prices.

Britain's economy was barely ruffled last year by the shock vote to leave the EU. But the steady rise in inflation since then, combined with weak wage growth, has slowed its momentum this year.

The opposition Labour Party on Tuesday sought to highlight rising costs for voters as it launched its policy proposals for the June 8 election, pledging a higher minimum wage and state involvement in the energy sector to keep prices down.

Last week, Bank of England (BoE) Governor Mark Carney warned 2017 will be challenging for consumers, with inflation now almost certain to overtake wage growth.

"The last thing Britain needs is another real wage slump. But rising prices are hammering pay packets," Trades Union Congress General Secretary Frances O'Grady said.

Prime Minister Theresa May called the snap election last month to strengthen her mandate to negotiate Britain's exit from the European Union. But living standards are a big campaign issue, pushing her party into a promise to cap energy prices that breaks with its usually pro-market agenda.

Despite the rise in inflation, however, the economy is far from overheating, and all but one of the BoE's eight policymakers voted last week to keep interest rates on hold.

Airfares Swing in Easter

Prices are displayed on a store window in London, Britain May 16, 2017.Neil Hall

The latest inflation figures were boosted most of all by rising airfares during the Easter holidays which last year took place in March. Rising clothing prices, higher car tax and electricity also pushed up consumer prices.

Many economists see more inflation ahead.

"We remain convinced that the market is underestimating the further upside for inflation from here," Scotiabank analyst Alan Clarke said. He expects utility bills, food costs and the weak pound to put more pressure on prices in future.

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Sterling briefly spiked to its highest in almost a week against the dollar before falling back. GBP=D4

Many economists say the impact of the fall in sterling on consumer prices will be felt more strongly in the coming months, and the central bank expects inflation to peak at nearly 3 percent by the end of this year.

Capital Economics said it expected inflation to exceed 3 percent before the end of the year but saw little sign of domestic inflation pressures becoming entrenched.

Excluding oil prices and other volatile components such as food, core consumer price inflation rose to 2.4 percent, the strongest rate since March 2013 and above economists' expectations for a 2.2 percent rise.

Services prices - which the BoE uses as a guide to domestic inflation pressures - rose by 3 percent, also the biggest jump since September 2013, pushed up by the higher air fares.

The ONS said house prices in March rose at their weakest rate since October 2013, up 4.1 percent on the year. Prices in London rose 1.5 percent, the weakest since March 2012.

Editing by Louise Ireland

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