Inflation has hit a three year high of 2.7% in the UK – up from 2.3% last month. This is the third month in a row that inflation has been above the Bank of England’s 2% target. According to the Office of National Statistics, air fares, clothing prices, vehicle excise duty and energy prices were the main contributing factors to the uplift in the Consumer Price Index.
The report revealed: “The upward effect for transport came mainly from air fares, with a rise of 18.6% reflecting the usual pattern of increasing prices around Easter. This counterbalanced a downward effect of similar magnitude in March 2017 and is a result of Easter falling in April this year, compared with March last year.”
Recreation and culture provided the largest downward effect on the change in the inflation rate.
Nick Dixon, Investment Director at Aegon, says that the increase in inflation will put more pressure on the Monetary Policy Committee to put up interest rates.
“The Fed has already raised the US central rate and, despite a downgraded growth forecast in the UK economy, it may only take a more stable outlook after the General Election for the Bank of England to follow suit,” he said.
Shilen Shah, Bond Strategist at Investec Wealth & Investment, pointed out that core inflation is lower at 2.4% this month – although that too is above the Government target. However he does not expect the Bank to increase interest rates as wage inflation has not yet picked up.
“Despite the higher than expected core and headline CPI prints, the BoE is likely to be unmoved given that the latest business surveys suggest employers are unlikely to compensate workers with inflation-bursting wage rises over the coming months given the uncertainty over the economic outlook and the Brexit negotiations,” he said.
Impact for Savers and Investors
Elliott Silk, commercial director at Sanlam, said that investors – especially those in retirement – should beware the erosive effect of inflation.
“The rise in inflation for the third month in a row is likely to damage retirees buying power and is set to take out a serious chunk of peoples' nest eggs,” he said. For those who retired before 2010 and took out a fixed annuity, the cost can be staggering.”
Silk suggests investors consider alternative assets in order to counter the cost of rising bills and low interest rates.
Savers are the worst affected by rising inflation – as investors can at least seek out equities paying dividends greater than the rate of CPI, where savers will struggle to get a real rate of return from a high street bank.
Rachel Springall, Finance Expert at Moneyfacts.co.uk, said: “As inflation is expected to rise well beyond its target, it will be increasingly difficult for consumers to get a real return on their investment if they remain invested in cash. To ride out the storm, now may well be the time for these savers to consider alternative investments, such as stocks and shares.
“Savers are unlikely to see a significant improvement in the cash savings market for quite some time, and the only indication of when the Bank of England may raise rates isn’t expected until we have left the EU at the earliest.”
