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03

UK inflation at highest level since 2013

Open-access content Tuesday 21st March 2017 — updated 5.50pm, Wednesday 29th April 2020

The consumer price inflation rate increased from 1.8% in January to 2.3% in February – the highest on record since September 2013 – according to figures from the Office for National Statistics (ONS) released today.

2

This is above the Bank of England's (BoE) 2% inflation target for the first time since November 2013, with rising fuel and food prices the biggest contributors to the increase.

The bank predict that inflation will peak at 2.8% in the first half of 2018, before falling back to its target, however others have forecast inflation to reach as high as 3.7% by the end of this year.

PwC senior economic adviser, Andrew Sentance, said: "It is no surprise to see inflation picking up further and going above 2%. This is the product of increasing global price pressures and the weakness of the pound.

"Inflation has been rising across a range of countries recently - including the US and members of the Eurozone - as higher energy and food prices feed through to consumers.

"The additional upward pressure from the decline in sterling over the past 18 months will push UK inflation up further over the course of this year - to 3% or possibly higher.

"Higher inflation will squeeze consumer spending to some degree but if the economy remains resilient, the BoE should be considering a rise in interest rates to counter the surge in inflation."

UK consumer price inflation over the last ten years is shown below:

Source: ONS

The depreciation in sterling against the US dollar is partly responsible for a 1.2% jump in fuel prices, according to Hargreaves Lansdown, senior economist, Ben Brettell, who warns against expecting interest rates to rise in 2017.

He said: "Oil is priced in dollars, and sterling has fallen around 13% on a trade-weighted basis since last June's referendum. As such, transport costs accounted for 0.8 percentage points of the overall figure.

"Despite elevated inflation, those hoping for higher interest rates are likely to be in for a long wait. The most recent BoE minutes note that to attempt to offset the effect of weaker sterling on inflation would come at a cost of higher unemployment.

"As such I expect the bank to look through these higher numbers and keep the bank rate at 0.25% for the remainder of this year."

Brettell also highlighted that real pay is officially shrinking, with inflation now higher than growth in average earnings which is currently at 2.2%.


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This article appeared in our March 2017 issue of The Actuary.
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