Inflation tipped to reach 3% over the next year
This is the highest inflation rate for 20 months, but still well below the Bank of England's 2% target. Over the coming months inflation is expected to rise, a consequence of the pound's decline.
Various economists and think tanks, including EY Item Club, expect inflation to be at around 3 per cent by this time next year.
This is a view shared by JPMorgan Asset Management, which has predicted that by the second half of next year inflation will be running at between 3 and 4%.
Inflation boost likely
Commenting on today's inflation figures, Anna Stupnytska, global economist at Fidelity International, says: “UK inflation should continue heading higher in the coming months, as the weak pound pushes up the cost of imports further.”
She argues that the extent of sterling depreciation seen thus far, around 18% in trade-weighted term since the end of 2015, could boost inflation by more than 1%, with the peak likely to occur in 2017.
“As the Bank of England announced in August, they are intending to look through higher inflation overshooting the target of 2% and keep monetary policy loose to help the economy navigate through the Brexit-related uncertainty.”
For savers, this results in a ‘double whammy', as rising inflation and falling yields eat away their savings. For consumers, rising inflation will lead to higher spending on everyday items.
Previously, a study by Fidelity showed that millennials face an inflation rate which is double that of older generations.
Scrutinising the figures
Ben Brettell, senior economist at Hargreaves Lansdown, comments: “July's CPI report marks the first piece of hard economic data since the referendum result, and as such will be keenly scrutinised for any clues as to the impact of the Brexit vote.
“Perhaps in a taste of things to come, import prices rose 6.5% year-on-year, their fastest rate in five years.
“It's almost certain that the weaker pound will cause inflation to rise more sharply in the coming months, but the effect of sterling's depreciation will take time to feed through fully into the figures as businesses gradually adjust to the new environment.”
He adds that forecasts suggest CPI inflation could ultimately reach 3%. However, he disagrees inflation will reach this figure, arguing such predictions are based on assuming sterling will remain weak.
“Underlying inflationary pressure is hard to see, with Brexit-related economic uncertainty likely to dampen both consumer spending and wage growth in the short term.
“The Bank of England is rightly ignoring what should be a temporary spike in inflation when it sets monetary policy,” adds Mr Brettell.
This article was originally published for our sister magazine, Money Observer.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
The Consumer Price Index is the official measure of inflation adopted by the government to set its target. When commentators refer to changes in inflation, they’re actually referring to the CPI. In the June 2010 Budget, Chancellor announced the government’s intention to also use the CPI for the price indexation of benefits, tax credits and public sector pensions from April 2011. (See also Retail Prices Index).