Inflation to Hit 2% in 2017

Savers and investors should prepare for a steeper rate of inflation, say economists as CPI figures revealed today show price rise of 1%

Emma Wall 18 October, 2016 | 4:08PM
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UK inflation has hit a near two-year high thanks to higher clothing costs as well as increased pricing in restaurants and hotels. There was a slight uplift in household bills too. Inflation rose to 1% last month from 0.6% in August, the Office for National Statistics said today. The rate is the highest since November 2014, when it was also 1%.

Inflation was expected to climb to 0.9%. Nonetheless, inflation continues to remain below the 2% Government target. Core inflation that excludes energy, food, alcoholic beverages and tobacco products increased to 1.5% from 1.3%.

The ONS said that recent weakness in the value of sterling caused by the vote to leave the European Union had no effect on the CPI measure of inflation, but it had influenced producer prices.

Younger Britons Feel Sharper Rate of Inflation

Aviva’s Age Inflation Index which looks at how inflation is felt by different age segments shows that for those aged younger than 30 are facing the steepest rate of inflation at 1.36%, while those aged over 75 are exposed to a lower rate of 0.68%.

Alistair McQueen, Savings & Retirement Manager at Aviva said that consumers should expect prices to rise further from here.

“If anything, today’s figures continue to shelter consumers from the real price pressures,” he said. “Many businesses will have implemented measures to help protect against the fall in Sterling, and many businesses will still be resisting the pressure to pass any price rises on to consumers. This resistance, however, comes at a time when import prices are rising by 9%. Resistance can only last so long.”

Inflation to Hit 2% in 2017

Anna Stupnytska, Global Economist at Fidelity agreed saying that given the recent fall in the pound, of around 23% since late 2015 and 17% since the Brexit vote, inflation is set to accelerate further.

“Inflation is likely to hit the Bank of England’s target of 2% in 2017, before overshooting and peaking sometime in 2018. Further falls in the pound could accentuate this trend,” she said.

“With personal incomes growing around 2% in nominal terms, it will not be long before real income growth hits zero, hurting consumption. While the Bank of England has signalled that they will overlook the inflation overshoot, I believe they will not ease policy further at their upcoming meeting in November. The recent currency plunge has loosened financial conditions significantly while economic data has been holding up, suggesting the Bank of England is likely to stay in the wait-and-see mode for now.”

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Emma Wall  is former Senior International Editor for Morningstar