Inflation jumps to pre-pandemic levels
That’s more than double the 0.7 per cent registered in March.
Meanwhile the consumer prices index including owner occupiers’ housing costs (CPIH) rose from 1 per cent to 1.6 per cent over the month.
According to the ONS, the big drivers in this jump were energy bills, off the back of the rise in the energy price cap, and transport costs which rose to their highest contribution level in two years.
Don’t hit the panic button yet
Laith Khalaf, financial analyst at AJ Bell, said that much of the inflation of the last year could be explained away by oil prices rising from an “exceptionally low” $20 a barrel to today’s price of $70 a barrel, and that as the global economy opens up there is the potential for further rises as demand picks up further.
He continued: “The UK is still way behind the US, where the latest inflation reading came in at 4.2 per cent, and CPI inflation is still below the Bank of England’s 2 per cent target. The Bank has made it clear that it will tolerate inflation rising modestly above target, without pulling the trigger on interest rate rises.
“If realised, a sustained inflationary period would be a paradigm shift from the last twenty-five years of extremely benign price rises, which have provided comforting mood music for stocks and bonds. Investors don’t need to hit the panic button just yet, but they do need to factor the potential for higher rates of inflation into their plans. Where inflation is concerned, it’s better safe than sorry.”
Inflationary concerns across the pond were blamed last week for a shaky day on the global stock markets.
No logic to saving in cash
Kevin Brown, savings specialist at Scottish Friendly, noted that the markets were understandably nervy about the potential impact of a significant rise in inflation, and noted that such a rise would also pose a threat to everyday savers.
He continued: “The reality of low interest rates and rising inflation means it’s not logical to save in cash for the long-term as you’re effectively committing yourself to losses.
“One way to hedge against rising inflation would be to diversify your money into multiple assets. This might seem like a big step for those people that are new to investing but it can be done easily through a stocks and shares ISA and will give you the potential to generate above-inflation returns.”
Inflation rising as economy opens up
That is an increase from the 0.4 per cent recorded in February, while the consumer prices index including housing costs (CPIH) increased from 0.7 per cent to one per cent over the same period.
Fuel costs was a factor in the rising inflation figure, with the ONS noting that the price of a litre of petrol stood at 123.7p in March, compared with 119.4p a year ago, and a recent low of just 106.2p per litre last May.
Clothing costs also jumped, off the back of increased discounting in February, according to the ONS.
Despite the level of discounting dropping back in March, it noted that the overall levels of clothing discounts on offer are unseasonably high at the moment.
Inflation rising appears to be the greatest economic concern at the moment with several industry representatives highlighting the risks.
They have repeated Roma Finance managing director Scott Marshall who earlier this month said: “Inflation is the biggest risk and it’s the one we have most conversations about.”
Rising confidence leading to more spending
Rachel Winter, associate investment director at Killik & Co, said that spending is rising on the back of the confidence provided by the success of the vaccine programme and the gradual unlocking of the economy, and suggested this may continue further as the weather improves.
She continued: “Many non-essential retail stores were greeted with huge queues when they reopened their doors on 12 April. Given that UK households will have amassed an estimated £250bn in savings over the lockdown, consumer spending could play a significant role in restarting the economy.”
Winter also pointed to increases in road traffic and job listings as “encouraging indicators” of the improving health of the economy.
Risk of inflation jump
Kevin Brown, spokesman at Scottish Friendly, suggested easing of lockdown was always likely to lead to a rise in inflation, but argued the spike was not as high as some may have expected.
But he added that as the final restrictions were lifted, inflation could be pushed well beyond the Bank of England’s two per cent target.
This was echoed by Adrian Lowcock, head of personal investing at Willis Owen. He concluded: “While inflation may experience a short term spike this year we believe longer term higher inflation poses a significant risk for investors.”
CPI inflation doubles but still low at 0.6 per cent
Rising transport costs along with increasing prices for clothing, and recreation and culture items helped increase inflation. These were partially offset by a downward contribution from falling food and non-alcoholic beverage prices.
CPI including owner occupiers’ housing costs (CPIH) 12-month inflation rate was 0.8 per cent in December 2020, up from 0.6 per cent in November 2020.
Rachel Winter, associate investment director at Killik & Co, said: “As we start the new year in a third national lockdown, and the continued impact on jobs is felt widely, consumers will be tightening the spending reins which is likely to put downward pressure on inflation.
“However, the figures for December show that a surge in Christmas spending has propped up inflation numbers for now, although it remains very low compared to previous years.
“It is essential that savers continue to monitor their options. With interest rates at record lows and the Bank of England keeping an open mind when it comes to negative interest rates, many will find their savings are not keeping pace with inflation.”
According to Moneyfacts, savers can’t keep pace with inflation in an easy access account without restrictions on age, location, or having a linked current account.
Savers can beat inflation with the most competitive one-year fixed rate account (0.8 per cent), but not the average rate, which Moneyfacts puts at 0.49 per cent.
Sarah Coles, personal finance analyst at Hargreaves Lansdown said: “Unusual pricing patterns produced by the pandemic doubled inflation in December – to 0.6 per cent. It means trying to beat this moving target with your savings has become increasingly exhausting.
“The crisis has shifted discounting around, so we get one month of rock bottom inflation, followed by a month of slightly bigger price rises.”
She added: “To make matters worse, higher inflation is expected to kick in during 2021. There are disagreements on exactly how high it will go, but there’s a broad consensus that it’s on the way up, which is going to take a toll on savings languishing in accounts paying next to nothing.”
Inflation pushed up by rising petrol and clothes prices as lockdown eases
The ONS said the figure was boosted by rising petrol and clothing prices. Petrol prices have surged at the fastest rate in almost a decade.
Between June and July 2020, petrol prices rose by 4.9 pence per litre, to stand at 111.4 pence per litre, and diesel prices rose by 4 pence per litre, to stand at 116.7 pence per litre.
Jonathan Athow, deputy national statistician at the ONS, said: “Inflation has risen, in part, due to the largest monthly pump price increase in nearly a decade, as international oil prices rose from their lows earlier this year.”
The ONS also said that the need for personal protective equipment (PPE) had increased prices for private dental treatment, physiotherapy, and haircuts.
As the restrictions caused by the coronavirus pandemic have been eased, the number of CPIH items that were unavailable to UK consumers in July has reduced to 12. The figure stood at 67 in June, 74 in May and 90 in April.
Ed Monk, associate director for personal investing at Fidelity International, said: “Beneath today’s inflation rise are signs that economic life is getting back to normal, with just 12 items in the inflation basket still unavailable to buyers due to Covid-19 restrictions. That’s down from 67 in June and 90 back in April. Prices for clothing and footwear help keep the rate higher in July, with shoppers unable to bank on discounts that are normal for the summer ahead of new lines in the autumn.
“While inflation appears to be creeping higher after a fall in the early months of lockdown, price rises remain way off the Bank of England’s two per cent target and likely to stay this way some time even in the face of significant government stimulus. With the UK now in a recession, August’s figures may be more telling of long-term inflationary moves and the Bank of England has forecast another dip in the rate.”
Laura Suter, personal finance analyst at investment platform AJ Bell, said: “The rise in inflation is another blow for savers who have been hit with successive cuts to interest rates since the start of the year. The only saving grace was that inflation was lower, meaning that getting a real return on their money was at least possible with the top-paying accounts. Now just one easy-access account pays more than inflation, NS&I’s Income Bonds, and that is only open to those with £500 or more to save.”
The inflation rise will mean a bigger increase in some rail fares from January. Rail fares rise in line with the Retail Prices Index (RPI) which rose to 1.6 per cent from 1.1 per cent.
Inflation makes surprise rise to 2.1 per cent in July
The figure contradicted market expectations of a fall to 1.9 per cent, from the two per cent in June and pushes it above the Bank of England’s two per cent target for the first time since April.
The Consumer Prices Index including owner occupiers’ housing costs (CPIH) 12-month inflation rate was two per cent in July 2019, up from 1.9 per cent in June 2019.
Between June and July 2019, there were large upward contributions to the change in the CPIH 12-month rate from games, toys and hobbies, and accommodation services, where prices for both rose by more than a year ago, and from clothing and footwear, and other financial services.
There were offsetting downward contributions to change coming from transport services and, to a lesser extent, from domestic fuels principally electricity and gas.
Emma-Lou Montgomery, associate director for personal investing at Fidelity International, said: “Today’s CPI inched just above the Bank of England’s target, hitting 2.1 per cent – reversing the trend we have seen over recent months.
“This change in direction was attributed largely to the prices for clothing and food. The decline in sterling is also a factor – as the weak pound could start to apply further upward pressure on prices in the coming months.
“In the short term, this news is a slight relief for savers who will feel less strain on their budgets as wages continue to outstrip inflation. Although yesterday’s earnings data offered some ointment to the wound, it is important to remember that the UK economy is far from out of the woods.
“With some speculation that the Bank of England will cut interest rates by the end of the year should there be a no-deal Brexit, it is key that savers prepare themselves now and get ahead of the game.”
Phil Smeaton, chief investment officer at Sanlam UK, said: “UK Inflation rates have shown incredible resilience, but the upward pressures are clear. Employment figures are strong, UK wage growth is at an 11-year high, and sterling weakness continues to push up the prices of imported goods.
“Consumers are pessimistic about their economic future, but prime minister Johnson is resolute in his belief that the UK economy will be ready to soar on 1 November. We are sure that Mark Carney is ready to stand by the prime minister and support his post-Brexit stimulus package.”
Inflation hits four year high as households need to find an extra £790
The consumer price index (CPI) rose from 2.7% the previous month, the Office for National Statistics said. Forecasters had predicted the rate to remain static in May.
Despite a fall in the price of motor fuels, higher prices for energy, food and recreational goods pushed the rate up.
This is the fourth consecutive month the inflation rate has exceeded the Bank of England’s 2% target.
The typical UK household will need to spend an extra £797 a year to maintain their standard of living enjoyed a year ago, according to Retirement Advantage.
Households are already feeling the pressure of rising prices and flat wage growth, with a report out yesterday from Visa showing spending fell for the first time in nearly four years in May.
Wage data out tomorrow is expected to confirm pay is shrinking in real terms, said Ben Brettell, senior economist at Hargreaves Lansdown.
High inflation is also bad news for savers as it erodes the real value of their cash.
According to Moneyfacts, not one of the 750 standard savings accounts on the market can outpace inflation.
The top-earning account from Atom Bank pays 2.3% and requires savers to tie their money up for five years. The best easy access account from Charter Savings Bank pays 1.11%.
Brettell said: “The general mood on the economy has become one of caution over the past few weeks, with first-quarter GDP figures disappointing, consumer spending looking weaker and Brexit-related uncertainty looming large.
“However, growth is expected to pick up somewhat in the second quarter, and it looks like the election result could make for a ‘softer’ Brexit, which could prove positive for the economy.”
He added: “Bank of England policymakers had previously said they expect inflation to peak at a little below 3% in the fourth quarter, but the evidence so far points to a sharper rise than anticipated. Just one member of the MPC, Kristin Forbes, has been voting for higher interest rates, and she leaves the committee next month.
“The balance of probability suggests the Bank will continue to ‘look through’ higher inflation and leave rates on hold to support the economy, but if inflation continues to surprise we could start to see members revising their positions.”
UK inflation rises to 15-month high of 0.5%
It is the highest rate of Consumer Price Index (CPI) inflation since December 2014, but is still a long way off the Bank of England’s official target of 2%.
Economists had expected a smaller uptick to 0.4%.
Rises in air fares and clothing prices were the main contributors to the increase in the rate between February and March. The earlier than usual Easter break is also expected to have played a part.
However, any chances of a bigger increase in March’s inflation figure were dampened by falling food prices and smaller rises in petrol prices than a year ago.
While today’s figure sees inflation move further into positive territory, talk of higher interest rates on the back of today’s data would be premature, according to Ben Brettell, a senior economist at Hargreaves Lansdown.
“Although inflation rose by more than expected, the overall trend remains weak, and places little pressure on the MPC [Monetary Policy Committee]. Core inflation, which strips out volatile components like food and energy, rose to 1.5% in March, but this is still significantly below the Bank’s 2% CPI target. The Bank said in February it expected inflation to undershoot the target until 2018.”
It is widely expected that Thursday’s MPC meeting will see the 85th consecutive month that the Bank keeps interest rates on hold at the record low level of 0.5%.
Today’s data was welcome news for the pound, which rebounded slightly having fallen to its lowest level in more than two years against a basket of global currencies last week.