Inflation rose to 0.6% in July, up from 0.5% the previous month. This is the highest level for the Consumer Prices Index, the main measure of UK inflation, since November 2014.
An increase in the price of fuel, alcohol and restaurant and hotel bills pushed up the rate of inflation. The falling cost of food and non-alcoholic beverages acted as a downward pressure on inflation. Clothing costs also fell slightly compared to July 2015.
Transport costs rose as the cost of fuel rallied in line with the oil price – this is in contrast to July 2015 when commodity prices were falling. Housing, water, electricity and gas costs remained unchanged month-on-month.
The RPI 12-month rate for July 2016 was 1.9%, the Retail Prices Index includes monthly mortgage repayment costs. The CPIH, is a measure of UK consumer price inflation that includes owner occupiers’ housing costs (OOH), this sits at 0.9% for the month of July.
Ben Brettell, senior economist at Hargreaves Lansdown forecasts CPI inflation could ultimately reach 3%, but says this hike will be temporary and the effect will fall out of the year-on-year calculation in the second half of next year.
What Does this Mean for the Economy?
Anna Stupnytska, Global Economist at Fidelity International said that while sterling is weak, inflation will continue to head higher, as the weak pound pushes up the cost of imports. The cost of imports rose 6.5% year on year, the largest increase in five years.
Stupnytska predicts that inflation could peak at around 1% thanks to the weakened currency, with this figure expected sometime next year.
She warns that higher inflation coupled with slower GDP growth could affect confidence.
“With the Brexit negotiations likely to last for some time, the related drag on growth will weigh on the economy over the next few months, despite the easy monetary policy and a potential fiscal boost likely to be announced in the Autumn budget,” Stupnytska added.
Jeremy Cook, chief economist World First, warned that unless employers meet rising inflation with an increase in wages the economy could suffer.
“As the pound falls, prices will rise; we are an island after all. While GDP has been revised lower by economists and the Bank of England since Brexit, inflation has naturally been revised higher on the basis of a weaker sterling,” he said.
“Of course, the most important relationship is between inflation and wages and rising costs that are not mirrored by rising wages – something that could easily befall a nervous and uncertain jobs market – would be a large negative for an economy so intrinsically linked with personal consumption.”
Bad News for Savers
Although inflation remains far below historic averages – inflation hit 5.2% in both September 2011 and September 2008 – any erosive factor is unwelcome while interest rates are at historically low levels – and expected to fall further.
Russ Mould, investment director at AJ Bell says he expects the Bank of England to push ahead with the three-part monetary stimulus programme, with the prospect of further interest rate cuts a possibility.
Charlotte Nelson, from Moneyfacts.co.uk, said savers now face a lethal combination of low SWAP rates, an ongoing rate cut war and now the recent Bank of England rate cut to 0.25%.
“Savers are seeing some of the best deals being withdrawn altogether, with 16 top ten deals withdrawn in July, which will mean the punishment of low rates is unlikely to cease for some time,” she warned.
“The effect of these rates cuts means that savers are facing all-time lows once again. For example, the average two-year fixed rate bond has fallen from 1.78% to 1.22% in just one year and the average easy access ISA has fallen by 1.11% to 0.90% in the same period.”
