Inflation hits 22-month high
Inflation, as measured by the Consumer Prices Index (CPI), has climbed from 0.6% to 1% in the year to September, its highest level in almost two years, with UK prices under pressure due to the weaker pound.
It last surpassed 1% in November 2014. Consumers have been protected against rising prices due to a combination of low oil prices, and a supermarket price war that has dissuaded retailers from passing on higher prices to consumers.
Today’s figures, published by the Office for National Statistics (ONS), suggest the weaker pound hasn’t translated into higher food prices yet, which are actually 2.3% lower than a year ago.
However, a recent high-profile spat between Tesco and consumer giant Unilever suggests households’ budgets could soon take the hit of higher import prices, caused by a weaker pound.
In fact, prices for physical goods are still falling and are 0.5% lower than this time last year. By contrast, the cost of services increased 2.5% over the last year, with insurance alone rising by 9.6% - this could be due to further increases in Insurance Premium Tax.
Education and communications also took a greater chunk of households’ spending, rising by 5.9% and 3.6% respectively.
Tom Stevenson, personal investment director at Fidelity International says inflation is likely to keep rising in the coming months.
He says: “The significant leap in the CPI from August has primarily been as a result of the plummeting pound which has pushed up fuel prices.
“Even though 1% is still some way off the Bank of England’s 2% inflation target, the impact of currency changes works with a lag so further rises in CPI should be expected. Indeed, inflation is expected to continue its upward charge, with some economists predicting that CPI could reach as much as 3% by next year, considerably overshooting the Bank of England’s target.”
Bank of England Governor Mark Carney last week said he was willing to let inflation climb above the Bank’s 2% target in the short term to protect jobs.
Creeping inflation represents a challenge to savers who are looking to grow their money in real terms. The top savings accounts have been slashed across the board since the Bank of England recently cut its base rate, and instant access accounts that pay more than 1% are few and far between.
Mr Stevenson adds: “Anyone with their savings still sitting in cash will struggle to generate real returns in this ultra-low interest rate and rising inflation environment. To stand any chance of generating an inflation-adjusted real return they’ll need to look further up the risk spectrum, investing in bonds issued by companies rather than the Government or moving into stocks and shares.”
The Retail Prices Index (RPI) rate of inflation rose to 2% in the year to September, up from 1.8% in August.
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Source: The Office for National Statistics, 18 October 2016.
Replaced as the official measure of inflation by the consumer prices index (CPI) in December 2003. Both the Retail Price Index and CPI are attempts to estimate inflation in the UK, but they come up with different values because there are slight differences in what goods and services they cover, and how they are calculated. Unlike the CPI, the RPI includes a measure of housing costs, such as mortgage interest payments, council tax, house depreciation and buildings insurance, so changes in the interest rates affect the RPI. If interest rates are cut, it will reduce mortgage interest payments, so the RPI will fall but not the CPI. The RPI is sometimes referred to as the “headline” rate of inflation and the CPI as the “underlying” rate.
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).
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
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).