The latest price inflation data published by the Office for National Statistics (ONS) show price inflation for the year to November edging upwards to its highest level since March 2012. With an annual rate of 3.1% the Consumer Prices Index (CPI) grew at 0.1% more than in the year to October.
The increase in price inflation in 2017 has been largely attributable to higher import prices resulting from the fall in the value of the pound since the June 2016 referendum vote for Brexit. This has particularly resulted in higher food and fuel prices – developments which have clearly been having a very direct and adverse effect on household budgets. Indeed data produced by Kantar Worldpanel show grocery price inflation running at an even higher rate than CPI inflation at 3.6%. With price inflation higher than the rate of average earnings growth a high proportion of households have been experiencing a fall in living standards.
The increase in inflation in November has been particularly attributed to the higher cost of recreational products, like computer games, and to the fact that air fares fell in November less than they fell in the same month in 2016.
Despite this further rise in inflation there is no risk of a further increase in Bank Rate in December. Last month the Bank of England’s Monetary Policy Committee (MPC) increased Bank Rate from 0.25% to 0.5% - the first increase since 2007. Provided price inflation starts to ease Bank Rate is unlikely to rise significantly next year. Currently the financial markets are expecting Bank Rate to be 1% by early 2019. That looks to me to be about right since in 2018 a weak economy and a stronger pound will help to push CPI inflation back towards the MPC’s medium-term target of 2%.
Much, though, depends on the movements in the value of the pound which are pivotal when it comes to price inflation. Such movements are currently driven particularly by developments in the Brexit negotiations and these are, of course, very unpredictable as the events of recent weeks have demonstrated. Last week’s agreement on the first stage of exit negotiations boosted the value of the pound. If the next stage of transition negotiations are viewed as going positively in terms of their impact on the economy the pound will strengthen further. This would cut import costs and help reduce the UK’s price inflation rate.
So regardless of how people voted in the referendum everyone has an interest in a positive outcome from the next stages of Brexit negotiations. That would push the pound higher, price inflation lower and provide some relief for households struggling with stretched finances.
Martin Upton
Director, True Potential PUFin
12th December 2017
About True Potential PUFin
True Potential PUFin is based at the Open University Business School in Milton Keynes, UK
True Potential PUFin is the first and only personal finance research centre in the UK that has an active teaching programme freely available to the public. Supported by the University’s excellence in delivering distance learning, the Centre is uniquely positioned to develop the public’s financial capability and to research the impact and effectiveness of its education programme.