Rising energy prices take blame for uptick in inflation as workers’ wages are squeezed

22 May 2019

Inflation has risen for the first time since August 2018 as rising household energy prices bear brunt of the blame.

The Consumer Price Index (CPI) measure of inflation stood at 2.1% for April 2019. CPIH, which includes housing costs, measured prices rising at 2%, bang on the Bank of England’s target set by government.

However, the slight slowdown in wage growth of 3.2% in March 2019 points to a squeeze on people’s purses beginning to show for the first time since salaries began growing faster than inflation in December 2017.

The figure suggest that rising energy costs have part of the blame to share for this increase. This in turn was caused by the recent increase in the tariff price cap set by the energy regulator Ofgem.

Peter Earl, head of energy at comparethemarket, comments: “Energy costs were a major driver in the spike in inflation – and the rise in these costs is partly attributable to Ofgem’s energy price cap increase.

“The estimated 15 million households currently languishing on a standard variable or default tariff have seen brutal increases to their energy bills. The new price cap level that came into force on 1 April saw those customers face an average annual price rise of £117, a hefty 10% increase, which all of the Big Six energy companies were quick to implement.

“Rather than preventing energy companies from repeatedly upping the cost of energy, the price cap looks to have done the opposite. Many customers have already switched to a more competitive fixed price tariff but, for the millions that remain, we strongly recommend shopping around to ensure they are on the best deal possible as this will help to minimise their household bill inflation.”

Steven Cameron, pensions director at Aegon warns that the trends are now moving against savers and consumers.

He says: “If this trend continues, individuals will need to guard their well-earned money from any fall in its purchasing power and be wary of an over reliance on cash savings. Inflation can severely curb consumer spending power and although the rate remains close to the BoE’s target, today’s increase is the fastest annual rise since December last year.

“Worryingly, this upward trend in price inflation over the last three months comes alongside a downward trend in wage growth. Three months ago, price inflation sat at 1.8% and earnings growth at 3.5%, meaning earnings were growing 1.7% faster than prices.

“The latest figures show price inflation at 2.1% and earnings growth at 3.2%, so the difference has fallen to 1.1%. For those of working age, it’s how much faster earnings are rising compared to prices that matter so it will be important to monitor this trend against a backdrop of continued Brexit uncertainty.”

Interest rate hawks

In typical economic conditions, when wages rise people have more money to spend. This in turn leads to inflation as prices rise in step with demand.

As the Bank of England is set a target of 2% inflation by the government, the traditional course of action to temper consumer demand would be to increase interest rates. However, the UK economy is not in ‘typical’ territory in this respect owing to the uncertain nature of political problems around Brexit.

Anthony Morrow, chief executive and co-founder of digital financial advice service OpenMoney, says: “Economists have been getting the future course of interest rates consistently wrong ever since the financial crisis struck a decade ago but, like a broken watch, eventually the consensus will be right.”

Rupert Thompson, head of research at Kingswood, adds: “The Bank of England did turn rather more hawkish on interest rates earlier this month due to longer term concerns of an inflation overshoot and the latest fall in the pound is likely to reinforce such concerns - notwithstanding today’s benign report.

“But Brexit, rather than inflation, is at the moment the key driver of interest rates. And with the uncertainties on this front growing rather than falling and no early resolution in sight, rates look set to remain firmly on hold for the time being.”

Mr Morrow agrees: “As long as uncertainty around Brexit continues, it’s unlikely the Bank will do anything dramatic. Savers need to get creative in seeking better returns on their money if they want to beat rising inflation and rock-bottom rates. Whether it is building a pot of cash for the future or a rainy-day buffer in case of emergencies, it’s never too soon to start saving and investing.”

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