Has the UK inflation rate risen for the first time since November?

  • img Harvey Cawdron
  • POSTED ON 15 Aug 2018

Claims

In July, the UK inflation rate increased to 2.5%, after remaining at 2.4% for the previous 3 months as the cost of transport and computer games went up. 

It was the first rise in the Consumer Prices Index (CPI) since November, and was in line with forecasts.

At the same time, the Retail Prices Index (RPI) measure of inflation fell to 3.2%. The Department for Transport uses this figure to set the maximum annual rise for regulated rail fares. 

Despite the CPI rise, wage growth is still ahead of inflation. On Tuesday, the Office for National Statistics claimed that the average earnings, excluding bonuses, increased by 2.7% for the 3 months to June. 

The inflation figures, released on Wednesday, show that rises in computer games and transport - up by 5.6% in the year ending July 2018 - were partially offset by decreases in clothing prices. 

For manufacturers, the costs of raw materials was 10.9% higher than in July 2017, the biggest rise in over a year. 

An oil price increase of over 50% during the period was the cause of much of that cost pressure. 

The CPI figure reached 3.1% in November, the highest it had been for 5 years, as the inflationary effect of the pound's fall after the 2016 referendum reached its full force. 

Earlier in the month, the Bank of England forecast that inflation would rise to 2.6% in July before declining back. The Bank expects that inflation will settle just above its 2% target in 2 years as interest rates are gradually increased. 

Tej Parikh, senior economist at the Institute of Directors, said that the rise in inflation showed that the cost of living squeeze is still present. He said that 'For households this isn't good news, as the already weak growth in their pay packets is being further eroded by high prices. This is likely to weigh down consumer spending, posing fresh problems for embattled high street businesses'.

He added that 'As the temporary factors pushing prices up fade away, inflation is expected to slowly fall back close to the target rate, but that will offer little respite for workers without a significant pickup to their salaries in tandem.' 

Samuel Tombs at Pantheon Macroeconomics stated that 'Unless inflation in the services sector strengthens dramatically, CPI inflation will fall below the 2% target in the first half of next year.' 

However, others think inflation will take slightly longer to reach its target. Contrary to Tomb's prediction, the Express report that Capital Economics UK Economist Andrew Wishart said ' The devaluation of the pound] is likely to prevent inflation from falling back as swiftly as we previously forecast. We still think that a fall back in oil prices and the ongoing reduction of the impact of the 2016 Sterling depreciation will allow inflation gradually ease to 2 per cent by the end of 2019. As a result, while real wages have started to recover, inflation is likely to prevent them from recording substantial increases, weighing on households’ finances and consumer spending.'