UK consumer price inflation has held at its highest level since April 2012, with the CPI rate holding at 3.0 per cent, latest figures for October show.
While consumers will be relieved that inflation held steady, the squeeze on them was likely still appreciable and it is almost certain that inflation of 3.0 per cent remains well above earnings growth, which was limited to 2.2 per cent in the three months to August.
While inflation of 3.0 per cent in October was below the Bank of England’s expectations, most Monetary Policy Committee (MPC) members are likely to maintain the view that the recent interest rate hike was justified given extended well above-target inflation and diminishing slack in the economy.
Reacting to today’s figure, the EY ITEMS Club said that it now expects inflation to fall back markedly as 2018 progresses.
It said that sterling’s past sharp drop has now essentially worked through and is set to fade, while oil prices are also softening overall from recent levels.
Producer price inflation rose by 2.8 per cent, mainly due to a slowdown in the rate of petroleum price growth. As with Consumer Prices, this is slightly lower than the markets were anticipating.
EY said it now expects inflation close to 2 per cent by the end of next year.
Howard Archer, chief economic advisor to the EY ITEM Club, said: “Sterling’s sharp drop in the second half of 2016 should have now largely fed through the pricing chain and the impact of this is seen as increasingly fading. Additionally, we expect oil prices to come off their recent more than two-year highs around $64/barrel with Brent oil seen averaging $55/barrel over 2018.
“Meanwhile, we suspect that ongoing subdued economic growth will continue to limit domestic price pressures despite recent increased BoE concern over diminishing slack in the economy.
However, commentators said earnings growth is still likely to lag far behind inflation.
Mr Archer added: “Earnings growth seems likely to pick up only gradually as some firms remain keen to limit their total costs in a challenging and uncertain environment. Fragile consumer confidence will likely deter workers from pushing hard for markedly increased pay rises despite recent higher inflation.”
As with the figures released in September, the rate of inflation continued to be driven by increases in the price of food.
Prices for food and non-alcoholic beverages increased by 0.4 per cent.
The increase in recreation and culture costs also continued from September, with a 0.5 per cent rise building on the growth in prices observed last month.
As highlighted by the ONS, the UK has consistently observed higher price inflation across both goods and services for the last six months.
Liz Cameron, chief executive of the Scottish Chambers of Commerce, said: “Although the hold in the CPI rate is a more positive outcome than the rise that many analysts were expecting today, the continued increase in the prices of food and recreational products emphasise the persistent pressure on the budgets of UK households. Furthermore, the CPIH figures highlight growing owner occupier costs, such as electricity and council tax.
“Rising mortgage payments, bolstered by the decision to raise interest rates, alongside the sustained weakness of sterling will also act to slow consumer demand and impact the bottom lines of businesses.
“These figures come at a crucial time for the Chancellor, and it is essential the Autumn Budget presents a range of measures to jumpstart the UK economy, including encouraging businesses to invest in their employees and boost productivity, look to new markets for trading opportunities and investment in essential infrastructure.”