“A serious threat to living standards” – experts give their view on the rise in inflation

21st March 2017

The Consumer Price index has risen to 2.3% compared with 1.8% in January with the Office for National Statistics attributing much of the rise to higher transport costs.

The rate in February 2017 was the highest since September 2013, having steadily increased since late 2015.

Rising transport costs, particularly for fuel, were the main contributors to the increase in the rate.

Prices for food increased by 0.3% between February 2016 and February 2017, following 31 consecutive months of prices falling on the year.

The rise comes as the ONS is shifting the headline measure from CPI to CPI-H which includes calculations of housing costs although this also reached 2.3%.

Below we give the views of four experts.

Pound weakness not oil likely to be main driver

Adrian Lowcock, investment director, Architas

“Inflation is rising, driven mainly by the recovery in oil prices last year as the weak prices from January 2016 drop out of the calculation. We are also seeing some inflationary pressures from the weaker pound as food prices also contributed to inflation.

“In spite of today’s rise, we believe inflation is likely to undershoot expectations.  The oil price recovered quickly from the lows in 2016 and its most significant impact on the inflation figure is likely to be in the next couple of months.

“The pound weakness following the Brexit vote is likely to continue to be the main driver for inflation. Whilst we believe we have seen the majority of the falls in the pound following the Brexit result, the knock on effects of higher import prices will continue to be felt. However, this is not a normal economic recovery and it is difficult to predict how easy it is for companies to pass on higher prices to customers. With wage growth slowing (2.2% in January) households have less capacity to tolerate higher prices.”

Inflation above target for the first time since 2013

Russ Mould, investment director at AJ Bell

“Inflation exceeded the Bank of England’s 2% target for the first time since November 2013 with both CPI and the new CPIH measures hitting 2.3% in February.  CPIH, which includes owner occupier housing costs, is now at its highest level since September 2013 and is at exactly the same level as wage growth meaning inflation will start to wipe out any advance people are seeing in their wages.

“Transport prices made the largest contribution to the increase as the price of oil increased fuel prices, although food prices had an upward effect on inflation for the first time since April 2014, demonstrating the impact the weak pound is having on the cost of imported goods.

“The question now is whether this data will prompt a move from the Bank of England on interest rates.  The 8-1 vote last week not to raise rates show that it is clearly of view this is a transitory spike caused by the weak pound and the increase in the oil price.  However, if oil stays where it is at $51 then oil will be flat year on year by Q4 and the effect will start to drop out of the transport element of inflation which was the largest contributor to the increase in February.

“The Bank of England and OBR see inflation peaking c2.8% and it will be wary of making an increase while wages are falling and inflation is increasing, so we are unlikely to see any knee jerk reactions from Mark Carney and his team.

“For savers, rising inflation should act as a spur to anyone who has large amounts of savings held in low or zero-interest paying bank accounts. For these people, inflation will eat into the value of their money and anyone in this position should consider whether taking some investment risk could help at least preserve the spending power of their savings.”

Inflation rise may not signal rate rise

Ben Brettell, Senior Economist, Hargreaves Lansdown

“Bank of England policymakers predict inflation will peak at 2.8% in the first half of next year, before a gradual fall back towards the 2% target. Many economists forecast a much higher peak, with respected think-tank NIESR saying inflation will reach 3.7%. But despite elevated inflation, those hoping for higher interest rates are likely to be in for a long wait. The most recent Bank of England minutes note that to attempt to offset the effect of weaker sterling on inflation would come at a cost of higher unemployment. As such I expect the Bank to look through these higher numbers and keep bank rate at 0.25% for the remainder of this year.

“Meanwhile inflation at 2.3% is now higher than the growth in average earnings (2.2%), meaning real pay is officially shrinking. The interplay between these two numbers will be closely watched over the coming months. The UK economy relies heavily on consumer spending and a squeeze on household budgets would not be good news. As for the next few months’ inflation bulletins – expect more of the same.”

A serious threat to living standards

James Klempster, Head of Investment Management at Momentum UK

“The weakness in sterling that occurred in the aftermath of the EU vote continued to make itself felt in consumer prices and housing costs throughout February. Given wage growth slowed down significantly during this period from 2.6pc to 2.3pc this is a serious threat to living standards. The next step is to see how much of this increase in prices can be included in wage negotiation, otherwise we will start to see consumers feeling the pinch in their pockets.

“With the triggering of Article 50 just around the corner, Brexit headlines are sure to become a major force behind the moving pound in the days ahead. The harsher the stance the EU takes, the more the pressure is likely to be felt. That is why we believe it is imperative to invest today in a strategy that aims, deliberately to generate returns in excess of inflation as this is the best way to put your savings and investments on the path to financial wellness.”

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