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Inflation at highest level since 2013

16 May 2017

1:55 PM

16 May 2017

1:55 PM

There’s bad news for households this morning following the news that inflation has soared to its highest level since September 2013.

According to the Office for National Statistics (ONS), inflation is now at 2.7 per cent, up from 2.3 per cent in March. This is some way above the Bank of England’s stated 2 per cent goal.

A number of factors contributed to the rise, but the main driver was higher air fares. This was largely because the timing of Easter pushed up the price of flights. In addition, tax changes in the Budget added to inflation as did rising costs of energy and clothing.


Meanwhile, the retail price index (RPI) measure of inflation, which includes council tax and mortgage interest payments, jumped from 3.1 per cent to 3.5 per cent over the same period. Like the rise in inflation, this was higher than expectations.

Azad Zangana, Schroders’ senior european economist, said: ‘Households are being squeezed. This was evident from the weakness in retail sales, and was hinted at by the fall in GDP growth published last month, with many of the consumer-facing sectors struggling. Indeed, the governor of the Bank of England, Mark Carney, warned that average pay growth was unlikely to keep up with headline inflation in the near-term, but could catch-up sometime next year. He mentioned Brexit uncertainty as a possible reason for subdued wage growth, but he thinks this could fade over time.’

Richard Berry, founder of the currency specialists, Berry FX, commented: ‘Inflation jumped, but Sterling went in the other direction against the single currency. The pound is in the currency market equivalent of a Catch 22. In theory, it should surge on the back of an above consensus number like this, but in practice interest rates aren’t going anywhere and the markets know that.

‘The Bank of England would sooner tolerate above average inflation than risk raising rates, which could offer an instant threat to what remains a highly leveraged economy. Mark Carney’s bearish words from last week’s inflation presser are still ringing in traders’ ears. The fact that Sterling dipped against the Euro in the aftermath of the announcement shows that a stagnant rate environment is well priced in. With the Macron and Merkel honeymoon still in full swing, Sterling could linger in its current range for some time yet.’

These signs of renewed pressure on households come weeks before the general election, with the main parties jostling to come up with the most attractive policies on the economy. But whichever party wins on June 8, one thing is certain: factoring in low inflation when planning your finances is crucial.

James Klempster, head of investment management at Momentum UK, said: ‘Consumers will start feeling the pinch in the coming months as inflation climbed at its fastest pace in almost four years in April. Although it’s unlikely that inflation will rise at the same pace for the rest of 2017, the reality is that it won’t be going away any time soon. That’s why planning ahead and investing to mitigate the effects of inflation is always a smart idea. We believe it is imperative to invest in products with the sole purpose of generating returns in excess of inflation. That way you prevent it from eating away at your cash savings and instead benefit from real returns.’

Helen Nugent is Online Money Editor of The Spectator

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