UK Inflation Rises - 21 September 2018
According to the Office for National Statistics (ONS) inflation in the UK rose to a six-month high last month to stand at 2.7%. This was worse than analysts had been anticipating with most expecting that the Consumer Price Index (CPI) measure of inflation would come in at 2.4%.
On the brighter side, wage increases continue to be above inflation (but only just) with wages (excluding bonus payments) rising by 2.9% for the three-month period up to July.
The August CPI figure is the second consecutive month of increasing inflation. The July figure came in at 2.5% and was itself the first rise seen in the inflation figure since November 2017. The current figure is the highest level that inflation has seen for six months in the UK.
ONS’s Mike Hardie, head of inflation, gave their analysis of why the price index has risen: "Consumers paid more for theatre shows, sea fares and new season autumn clothing last month. However, mobile phone charges, and furniture and household goods had a downward effect on inflation."
The CPI inflation figure measures inflation against the comparable month one year before. Many people feel that the CPI figure does not accurately reflect the higher cost of living they see in their daily lives, but it is the official measure. It will be interesting to see if August’s wage rise data has managed to keep pace with inflation.
The Bank of England raised interest rates last month to 0.75% (nothing in historic terms: the long-term average interest rate in the UK is 7.57% (1971-2018)) and it expects interest to fall back to its target value of 2% by 2020. The inflation figure and a desire to normalise interest rates to provide a tool to choke off inflation or stimulate the economy would suggest that rates will rise further. However, all projections will be dependent on the future relationship between the UK and the EU. The downside risk to Sterling in the event of a “no deal” Brexit could push interest rates up dramatically in a bid to prop up the value of Sterling.