Inflation expected to stay at highest level in nearly four years

Inflation is expected to remain at its highest level in nearly four years, as rising prices on the back of the Brexit-hit pound continued to squeeze British households.

Friday, 14th July 2017, 6:33 pm
Updated Tuesday, 18th July 2017, 8:29 am
Higher inflation will increase pressure for a rise in interest rates

The Consumer Price Index (CPI) measure of inflation is forecast to come in at 2.9% in June, according to consensus estimates, in line with May’s figure but above April’s reading of 2.7%.

It would leave inflation at a near four-year high, as the last time inflation reached 2.9% was June 2013.

The figures will extend the squeeze on household finances as inflation outstrips wages, with CPI having soared as the Brexit-hit pound pushed up the price of imported goods.

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Road fuel prices are believed to have dropped by around 1.1% month-on-month in June, according to Scotiabank’s estimates, while core items such as clothing, household and recreational goods continued to rise.

Alan Clarke, head of Scotiabank’s European fixed income strategy, said food prices and air fares likely made the most notable gains last month, alongside smaller increases in alcohol costs, restaurant prices and package holidays.

If consensus forecasts are correct, CPI will continue to outpace the Bank of England’s 2% target and will put pressure on policymakers to consider hiking rates beyond 0.25%.

The Bank of England said in its May inflation report that CPI would peak at 3% later this year, as the pound’s slump following the Brexit vote causes price tags on everyday items to tick higher.

Mr Clarke said he believes CPI will exceed consensus estimates, having reached 3% in June, forcing the Bank’s governor, Mark Carney, to write an official letter to the Chancellor explaining why inflation has surpassed its target by 1%.

“(If) inflation does enter letter writing territory, it will be symbolic and provide ammunition to the hawks on the MPC (Monetary Policy Committee),” Mr Clarke said.

“To be clear, the MPC is not short-sighted; their focus is the medium-term outlook.

“Nonetheless, a sufficiently big upwards revision to near-term inflation is likely to have ripple effects on the medium-term outlook, which could be used to justify policy tightening.”

Recent comments from MPC members including Mr Carney suggest there is growing support for a rate hike.

Mr Carney said at the end of last month that “some removal of monetary stimulus is likely to become necessary”, but would depend on whether an increase in business spending could counter the slowdown in consumer consumption triggered by rising inflation.