Food and Fuel push UK Inflation to 1.8 percent
Inflation hit the highest level since June 2014, data from the Office for National Statistics (ONS) showed on Tuesday (14 February). British consumer prices rose in January and will continue to rise, driven by higher global oil prices and the weakened pound. The pound was $1.25 against the dollar before the inflation data was out, and fell to $1.24 later in the morning.
The Bank of England expects inflation to reach 2.7 percent by the end of 2017, while many economists believe it will go higher than 3 percent. This will put more strain on the spending power of British households, especially, when consumers have helped the UK economy grow after the UK Referendum.
The UK consumer price index (CPI) was 1.8 percent in January compared with December’s 1.6 percent. This means that consumer prices rose by 1.8 percent, while prices paid by factories were 20 percent higher. Mike Prestwood, ONS head of inflation, said: “The latest rise in CPI was mainly due to rising petrol and diesel prices, along with a significant slowdown in the fall in food prices.”
In the last three years, the cost of imported food has risen, but the prices of food and non-alcoholic drinks has fallen due to supermarket competition.
While food and fuel were more expensive, this was somewhat balanced by the fall in the prices of clothing and footwear.
The rise in prices affected factories the most since raw materials’ prices increased by 20 percent compared to last year. This affects consumers, since output prices—also known as factory gate prices, is the amount UK manufacturers receive after selling their goods to the market—rose by 3.5 percent, something that will eventually push consumer price inflation in the following months. Ben Brettell, senior economist at Hargreaves Lansdown, fears that real incomes will start falling again:
“Sterling has fallen around 12% on a trade-weighted basis since last June’s referendum, and as a result producers are facing sharply higher input costs – up 20.5% on a year earlier. It’s almost unthinkable that cost increases of this magnitude can be fully absorbed, leaving firms with little choice but to pass at least some of the burden onto consumers. By the end of the year price inflation looks set to outstrip wage growth, which will squeeze household budgets in the short term.”
The chief executive of consultancy Retail Economics, said: "We're only seeing the thin end of the wedge in terms of inflation." He added: "We expect inflation will accelerate sharply in the coming months, hitting 3 percent by the end of the year."
Bank of England
Early next year the BoE is expecting inflation to reach 2.8 percent. At the moment, members of the bank’s rate-setting Monetary Policy Committee (MPC) consider the rise in inflation a temporary consequence of the weak pound. They also believe that higher prices won’t affect wage growth, which will remain down.
One of the members of the MPC, Kristin Forbes, said she was beginning to feel “uncomfortable” with the central bank's low interest rates, arguing that they would need to rise if prices continue to be going up.
But others argue that the bank's rates should remain as they are because of the uncertainty of the economy after Article 50 is triggered. BoE Governor Mark Carney has warned of "twists and turns" in the coming years as Prime Minister Theresa May begins her Brexit negotiations.
How high inflation affects your income
The rise in inflation means that many people are worried about their disposable income, given that their wages will remain the same. A spokesperson from the Treasury expressed this by saying: “The government appreciates that families are concerned about the cost of living and that is why we are cutting taxes for millions of working people and have frozen fuel duty, saving an average driver £130 a year compared to previous plans.”
But the Trades Union Congress (TUC) General Secretary Frances O’Grady is concerned that workers’ incomes are already feeling the pressure: “The last thing working people need is another pay squeeze. But prices are shooting up and real wage growth is stalling. Next month’s Budget must set out a clear plan for preventing another living standards crisis – families still haven’t recovered from the last one. This should include ending the current pay restrictions on nurses, teachers and other public servants.”
Since political events such as Brexit are moving the strings of the pound, politicians and economists would need to navigate through “twists and turns” so that they manage to deliver a more bearable standard of living that works for everyone.