Surprise rise in inflation a “body blow” to UK households

A shock rise in inflation over the last six months has seen the cost of living rise

The UK’s inflation rate unexpectantly rose to 2.7% in the six months to August. The Office for National Statistics (ONS) put the unexpected rise down to an increase in transport costs, including air and rail fares and a rise in tickets for entertainment events such as theatre visits.

A rise in inflation could dampen a recent rally in the strength of the pound, further pushing up costs for importing businesses and the prices consumers pay for imported goods. The inflation rise will come as a surprise to the Bank of England which raised interest rates last month to 0.75% with a view on inflation being below or around 2.4% in August, having been 2.5% in July.

The rise in CPI over the last 3 years. Source: ONS

Other external factors will have fed into the rise in inflation, notably pound devaluation, a rise in oil prices this year and ongoing uncertainty over Brexit negotiations. Reuters reported the rise in inflation was above all forecasts from a recent poll of economists.

The rise in consumer prices is in contrast to very slow growth in economy and the housing market which saw the biggest drop in London house prices for 9 years. The increase in inflation will mean the majority or people are now getting poorer as the cost of living rises above wage growth.

Emma-Lou Montgomery, associate director for Personal Investing at Fidelity International, told The Guardian people would lose out as although regular pay, excluding bonuses, had recently risen to 2.9%, the average increase in total pay was at 2.6%.

“Today’s inflation figures are a body blow to UK households after the latest CPI figures showed that price rises jumped 2.7% in August, driven largely by increased costs for recreational and cultural goods and services, transport services and clothing. The latest figures mean that wage growth including bonuses (2.6%) has once again fallen behind inflation and means that we are all getting progressively poorer again.

“To rub salt in the wounds there’s also a distinct possibility that inflation could continue to climb as the oil price has recently crept up to over $80 a barrel, meaning we are likely to see prices at the petrol pumps start ticking up.

“And on top of this there’s the ongoing uncertainty around the Brexit negotiations which could put an end to sterling’s recent good run. If recent sterling strength is reversed, then the cost of imported goods will start going up again and UK businesses reliant on these goods will need to start hiking prices in order to protect their margins.”

The climb in RPI figures over the last 3 years. Source: ONS

The ONS’ alternative inflation measure, the retail price index (RPI) has risen to 3.5% from 3.2% in July.