UK Inflation Stays at Three-Year High of 2.3%

Rising food and clothing prices kept Britain’s inflation rate at its highest level for more than three years last month, putting household budgets under pressure as the Brexit effect on the pound worked its way through the economy.

Official figures put inflation on the consumer prices index (CPI) at 2.3% for the second month running in March, in line with economists’ forecasts, as food prices rose at the fastest pace for three years, increasing 1.2% on the year.

Analysis UK inflation is only going one way. Let’s hope interest rates don’t follow
The question is not whether inflation will continue rising in 2017 but how high it will go.

Economists said inflation was likely to push higher in April and they warned the rising costs of essentials such as groceries were already eating into household budgets and leaving people with less cash to spend on other items. Reports from retailers suggest sales slowed in recent months.

“Today’s release confirms our expectations that 2017 will see the end of the consumer spending boom which has driven economic growth in recent years,” said Nina Skero at the consultancy the Centre for Economics and Business Research.

“With the prices of essentials such as housing costs, food and transport on the rise, less money will be left over for discretionary spending. This is especially true given that wage growth is unlikely to keep up with the elevated inflation levels.”

Much of the pressure on inflation has come from the pound’s sharp fall against other currencies after last June’s vote to leave the EU. That makes imports to the UK more expensive, with firms now passing on those higher costs to shoppers. There has also been a marked effect on inflation in the UK and other countries from higher global oil prices.

Inflation has risen above the Bank of England’s 2% target from just 0.3% this time last year, bringing an abrupt end to a brief period when Britons enjoyed incomes rising in real terms, or faster than inflation.

“Rising prices and sluggish pay increases mean that real earnings growth has now ground to a halt,” said the TUC general secretary, Frances O’Grady. “Without government action, another living standards crisis is on the cards.

“We urgently need more investment in skills and infrastructure to build strong foundations for better-paid jobs. And it’s time to scrap the pay restrictions hitting midwives, teachers and other public servants.”

“We are building an economy that works for everyone and helping families with the cost of living by cutting income taxes for 31 million people, freezing fuel duty and increasing the national living wage to £7.50 per hour,” said a Treasury spokesman.

The Resolution Foundation said the latest inflation figure meant real average earnings look set to have fallen during the first three months of 2017.

“With further price rises expected later this year, and no sign yet of wage settlements responding, this pay squeeze looks set to be deeper and longer than expected,” said Stephen Clarke, economic analyst at the thinktank.

The Office for National Statistics said price changes for a range of goods and services in March put upward pressure on inflation. However, some of that was offset by downward pressure on overall inflation from air fares. The cost of a flight rose sharply between February and March 2016 because of the early Easter holidays but this year Easter is later and there has been no rise in air fares.

A dip in petrol and diesel prices last month also tempered the pressure on inflation. However, compared with a year ago, fuel costs were up 17% in March.

There was upward pressure from a variety of foods with only fruit having a small downward effect. The largest upward effects came from margarine, low-fat spread and crisps. Whisky and beer prices rose and cigarettes also played a role in keeping inflation high last month. Clothing and footwear prices were another factor, rising 2% between February and March.

Some economists predict inflation reaching 3% this year although few feel the cost pressures will push the Bank of England into raising interest rates from their record low of 0.25%.

One of the nine members on the Bank’s monetary policy committee (MPC), outgoing policymaker Kristin Forbes, voted for a rate rise in March. But the Bank’s governor, Mark Carney, and other policymakers have indicated they are happy to tolerate inflation being above their government-set target in return for supporting growth and safeguarding jobs with low borrowing costs.

“All told, we think that CPI inflation will peak at just over 3% before the end of 2017,” said Ruth Gregory at the consultancy Capital Economics.

“But we don’t think that that will panic the MPC into raising rates imminently. Given the uncertainty around the Brexit negotiations and the fact that there has been little sign of building domestic cost pressures, we think that the MPC will hold off until mid-2018 before raising rates.”

The next figures on wage growth and unemployment are published on Wednesday. Economists expect average pay growth was 2.2% in the three months to February compared with a year earlier, according to a Reuters poll.

The Guardian

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