Despite Mrs May’s protests during her electioneering yesterday that the Pound was falling before Brexit (depends on the time window that you consider, of course), the decision that the UK would be leaving the EU put a strong downwards momentum on Sterling. This means that imported goods and raw materials which are not priced in Pounds become relatively more expensive, creating inflationary pressure. As Mark Carney pointed out recently, inflation from this source will be largely unaffected by central bank interest rates since it is not the money supply which is causing the inflation (spurring demand and pushing up prices), but the declining value of Sterling. Whilst boosting UK central bank interest rates would give a fillip to the value of the Pound in the short term, at least, it would not be sufficient to put a significant dent in inflation.
The price rises stemming from the Brexit decision are feeding through into the inflation figures. In some cases, businesses had hedged against changes in the value of Sterling, allowing them to delay increasing the prices for their goods or services, but these hedges operate for a limited time only.
The Office for National Statistics (ONS) has announced that UK inflation has picked up from 2.3% in March to stand at 2.7% for April. Part of this increase has been ascribed to dearer air fares (reflecting a hike in the price of aviation fuel which is related to crude oil prices which are Dollar denominated) which were felt last month due to holidaymakers taking Easter breaks last month. Ironically, fuel prices fell during the month (because speculators in the oil sector worried that the wheels would be coming off an oil production cut-back), but oil prices are again strengthening, so it won’t last!
Inflation is now at its highest level since September 2013 and the Bank of England is expecting it to peak at 3% this year. UK wage growth for the first 3 months of the year came in below inflation at 2.1% meaning that purchasing power in the UK is declining.