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Rising inflation prompts interest rate hike questions

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  • 22/05/2019
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Higher energy prices and air fares have helped to nudge inflation above the Bank of England’s target for the first time in four months, raising questions about potential interest rate hikes.

 

The UK’s consumer price index (CPI) measure of inflation rose to 2.1 per cent in April, up from 1.9 per cent in March, according to the Office for National Statistics (ONS).

This sits above the Bank of England’s inflation target rate of 2 per cent.

Under normal circumstances, rising inflation could act as a trigger for the central bank to raise interest rates.

However, Brexit uncertainty means the Bank of England may hold fire.

“With the Brexit uncertainty dragging on the central bank is likely to remain in wait and see mode,” said Sophie Kilvert, of wealth manager Seven Investment Management.

Ben Brettell, senior economist at Hargreaves Lansdown, added: “The Monetary Policy Committee (MPC) is rightly reluctant to tweak policy while Brexit hangs over the economy like the Sword of Damocles.

“Moreover, fuel and energy prices are notoriously volatile from month to month, and are usually led by factors outside the control of domestic monetary policy.

“I’d expect the headline rate to fall back as we move through 2019.”

 

Inflation up, wages down

The ONS said electricity and gas prices rose by 10.9 per cent and 9.3 per cent respectively between March and April, thanks in part to the increase in Ofgem’s energy price cap on 1 April.

Most of the big energy suppliers hiked their standard variable rates as a result of the price cap rise.

The largest offsetting contribution came from a range of recreational and cultural items, including computer games and package holidays, the ONS said.

The upward trend in inflation coincides with a slowdown in wage growth.

Wages rose by 3.2% over the three months to March, down from 3.5% over the three months to February.

“The news will worry consumers as real wage growth comes under threat once more, after a year of inflation running below wage growth,” said Ian Forrest, investment research analyst at The Share Centre.

 

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