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.