UK Coast
August 8, 2016

Inflation freeze is bad omen for family finances

Inflation is on track to reach 3 per cent in the coming few months, subjecting households to the tightest financial squeeze in years, economists claimed after the official rate held steady in March.

Consumer prices including housing costs, the Office for National Statistics’ preferred measure, rose by 2.3 per cent last month, the same pace as in February. The pause was expected but hinted at underlying inflationary pressures as Easter came early last year, driving up spending in March 2016.

“The March data is likely to represent only a temporary pause in the upward march in inflation,” Martin Beck, senior economic adviser to the EY Item Club, said. “April will see the Easter effects unwind and more of the recent increases in domestic energy bills hitting the inflation index.”

Inflation has surged in recent months and is now at its highest level since September 2013. It is also above the Bank of England’s 2 per cent target and on course to rise further, athough policymakers have said that they will tolerate the overshoot rather than raise interest rates. Mr Beck said that CPIH was “likely to peak above 3 per cent in summer”, a sentiment matched elsewhere.

Surging inflation has been driven by the weak pound, which has pushed up import costs, as well as rising oil prices, which had been falling a year ago. Petrol prices were up 17.1 per cent year on year and the ONS data showed that food prices rose by an annual 1.2 per cent in March, the biggest increase in three years.

The pound, which has fallen by about 12 per cent on a trade-weighted basis since the Brexit vote, barely moved on the inflation data. Against the dollar sterling was up 0.1 cent at $1.2421.

Rising inflation is squeezing households, which have started to cut back on non-essential items.

Non-food retail sales suffered their steepest drop in nearly six years in the first quarter of 2017, the British Retail Consortium reported separately.

Resolution Foundation, a think tank, said that the pause in inflation would not “prevent Britain’s pay squeeze returning”. Wages are already rising more slowly than inflation, at 2.2 per cent, and official pay figures due on Wednesday are likely to show that the annual rate of wage growth has slowed to as little as 2 per cent.

“Real pay growth is expected to have fallen to around 0.1 per cent in the three months to February,” Resolution said, the first squeeze on incomes since 2014. Real pay, after inflation, is not expected to recover to pre-crisis levels for another four years.

Energy providers have been raising prices recently on the back of the recovery in the oil price and the additional cost for the dollar-denominated commodity in sterling prices. The biggest fall in prices came in air fares, which were down 22.8 per cent.

Factory input prices continued to soar in March, highlighting the pressure manufacturers and other importers are under and hinting at future price rises still to come. They rose 17.9 per cent compared with last year. The one bright spot was a fall in core inflation — which strips out volatile energy and food prices — from 2 per cent to 1.9 per cent.

Elizabeth Martins, UK economist at HSBC, said: “Given the seasonal effects, the fact that UK inflation is unchanged is noteworthy. Across the rest of Europe, inflation surprised to the downside, falling back from February’s highs. The fact that the UK did not fall back, even with a 22 per cent drop in air fares, points to underlying pressures that we are not seeing elsewhere in Europe.”