Inflation drops to 2.5% but households still 'squeezed'

18 April 2018
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Inflation dropped to 2.5% in February, giving consumers feeling the pinch some welcome relief. 

The Consumer Prices Index (CPI) rate of inflation fell from 2.7% the month before, according to latest figures from the Office for National Statistics. 

Falling clothing and footwear prices helped ease the pressure on households in the month, with the cost of furniture and household equipment, and alcoholic drinks and tobacco also falling.  

Prices for recreational goods and cultural services, including tickets to live music events, climbed in the month and transport costs also edged up. 

The rate was even lower, according to the newer ONS measure of inflation, CPIH, which includes owner-occupiers’ housings costs. The CPIH rate of inflation fell to 2.3% in March from 2.5% the month before. 

While price rises are easing off, wage growth has accelerated. Average wages excluding bonuses were up by 2.8% in the three months to the end of February, growing at a faster rate than CPI inflation for the first time in a year. 

Philip Smeaton, chief investment officer at Sanlam UK, adds: “With inflation falling back towards the 2% target and wage growth overtaking inflation for the first time in more than a year, it finally looks like the squeeze on living is easing.”

But Alistair Wilson, head of retail platform strategy at Zurich, adds: “While households can breathe a sigh of relief, family disposable income remains squeezed. More needs to be done to help make what little savings people can afford to put away go that bit further.”

Stepstoinvesting.com, a website run by the team at Janus Henderson Investors, points out that while inflation is falling, it is still eating into the value of people’s cash savings as it is still higher than the rates on savings accounts. It estimates that UK savers have seen the purchasing power of their savings plunge by £30.3 billion as inflation has outstripped the interest they can earn on money in the bank. 

Experts say that strong inflation, wage growth and unemployment data make the possibility of an interest rate hike by the Bank of England in May likely. 

Kevin Doran, chief investment officer at AJ Bell, explains: “The Bank of England will be pleased to see inflation falling back towards its 2% target but with economic data looking generally solid, the Monetary Policy Committee is still going to be thinking very hard about raising interest rates when it next meets in May. 

“However, even this won’t offer much succour to savers as any rises are likely to be modest and certainly nowhere near enough to cancel out inflation.”  

 

 

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