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Inflation may have fallen to a three-year low, but anyone paying for services — from a pub meal to a hotel stay — still faces prices that are rising faster than expected.
Although food and energy price inflation has cooled, analysis of official data released on Wednesday shows how consumers are still facing a squeeze to their spending ahead of the general election.
Services inflation is also a key indicator of underlying price pressure for the Bank of England when it considers interest rate decisions. Services price growth was higher than forecast by the BoE in May’s monetary policy report and above analysts’ expectations.
“The big issue at the moment is that services prices are still rising rapidly,” said Thomas Pugh, an economist at consulting group RSM UK.
Britons paid more than £124 on average for a night at a hotel in May, which is 12 per cent up from the same month last year and 48 per cent higher than in May 2019, before the pandemic, according to detailed data published by the Office for National Statistics.
Similarly, the cost of a range of services — a hot meal at the pub, a restaurant main course, nanny fees, fish and chips takeaways, theatre tickets, swimming pool tickets or car services — rose between 6 per cent and 11 per cent, with the highest prices since detailed records began in 2018.
The figures suggest that households continued to face elevated prices, which are still rising fast in many services, despite overall inflation dropping to the BoE’s target of 2 per cent for the first time in three years.
The decline in headline inflation was welcomed by Prime Minister Rishi Sunak’s Conservative party, which trails about 20 points behind Labour in the polls and had made reducing inflation one of its main pre-election promises. However, Rachel Reeves, Labour’s shadow chancellor, said that working people were still “worse off”.
Chris Hare, an economist at HSBC, said there was a “broad-based stickiness” in the figures, despite fluctuations that included a 14.9 per cent monthly increase in volatile air fares.
With the BoE widely expected to hold interest rates at 5.25 per cent on Thursday, Hare said that “momentum in wages and services inflation will likely need to show clear signs of softening over the next couple of months” for a cut to be considered.
There are several reasons why services inflation remains stubbornly high, including the rising costs of broadband or mobile phone contracts, which are updated annually in the spring.
Businesses are also passing on higher wages through prices, which matters more in the labour-intensive services sector. The national living wage rose by 9.7 per cent in April, and overall regular wage growth was still running at 6 per cent in the three months to April.
Services inflation rose at an annual rate of 5.7 per cent in May, which is worryingly high for policymakers, even if marginally down from 5.9 per cent in the previous month. The price of accommodation services rose at an annual rate of 7 per cent, and the cost of package holidays was up 9 per cent.
While wages are now rising faster than inflation, real earnings remain largely unchanged from late 2020, while overall consumer prices are still up 21 per cent from May 2021.
As a result, consumers “have not been able to feel better off”, said Paula Bejarano Carbo, economist at the National Institute of Economic and Social Research. “Households are very much still feeling the hit from the post-crisis rise in the price level,” she added.
Prices are down from their peak for energy, and for many foods and goods. Cheddar cheese, for example, cost £8.78 a kilo in May, down from £9.65 in May last year, with prices falling for frozen prawns and fresh salmon, milk, butter, cereals, pasta, chicken breast and baked beans.
The price of furniture, household appliances and tableware were all down from last year. Overall goods prices fell by an annual rate of 1.3 per cent in May, the second month of deflation and to their lowest level since 2016, while food inflation eased to 1.6 per cent last month, from a 45-year high reached in March 2023.
This is because lower energy prices are feeding through the supply chain and demand for goods has weakened after the pandemic-induced spike. Due to low demand “retailers have been forced to start to cut prices recently”, said Pugh at RSM UK.
However, overall food prices are still 30 per cent higher than in May 2021, before they surged following Russia’s full-scale invasion of Ukraine. While falling year on year, energy and goods prices are up 40 per cent and 21 per cent from May 2021 respectively.
James Smith, research director at the Resolution Foundation, said: “The legacy of a long period of very high inflation means there is unlikely to be much of a feelgood factor among families, as they continue to struggle with the higher cost of essentials.”
