UK inflation hit a six-month high in August at 2.7%, meaning inflation is once again rising faster than wages. The surprise reading was higher than the 2.5% in July, despite economists widely expecting it to be lower. Month-on-month, consumer prices climbed 0.7%, faster than the expected 0.5%.
The increase in the Consumer Price Index was largely driven by higher costs for theatre tickets, transport and autumn clothing.
Company input prices, the cost of goods bought and sold, rose 8.7% on the year. This, warns Ben Brettell, senior economist at Hargreaves Lansdown, is “a clear sign that inflationary pressures could be building in the domestic economy”.
With the oil price, now above $80, continuing to rise, Emma-Lou Montgomery, associate director for personal investing at Fidelity International, says we’re likely to see higher petrol prices going forward, too. This could see inflation rise further in the coming months.
Montgomery calls the figures “a body blow to UK households” and mean “we are all getting progressively poorer again”. That goes for savers, too. There are now only four fixed-rate bonds, based on a £10,000 deposit, that can match or beat inflation, according to data from Moneyfacts.
Only 1% of the standard savings market can now boast a return higher than inflation, though Rachel Springall, finance expert at Moneyfacts, warns these all lock funds in for the longer term.
The average increase on easy-access and notice accounts in August was just 0.16%, well below the 0.25% interest rate rise last month. “There are murmurings of another base rate rise before the year is out, but whether this will, in turn, feed the savings market and result in many more deals beating the level of inflation is highly unlikely,” Springall adds.
For those wanting quick access to their cash savings, Springall suggests looking for alternatives such as high-interest current accounts. Be mindful, though, that these typically only pay high interest on small balances and have eligibility criteria that must be met.
The news poses a dilemma for Mark Carney, who has recently agreed to extend his term as Governor of the Bank of England to help aid the Brexit transition.
Brettell expects the figures to reinforce expectations policymakers will lift interest rates gently over the next couple of years. However, they will be unwelcome news for the Bank of England, who will be “desperate to leave policy unchanged until we get some clarity over Brexit and won’t want to be forced into a rate rise by accelerating prices”.
