Inflation rises to 2.9% ahead of Monetary Policy Committee meeting
Inflation, as measured using the Consumer Price Index, reached 2.9% in August 2017, up from 2.6% in July 2017. Including housing costs in the CPIH measure, inflation reached 2.7%, a joint-high with May 2017 since April when inflation reached 2.8%. The increase in inflation was largely attributed to a record breaking rise in the prices of clothing and footwear which reached 4.6% - the highest on record for the CPIH measure since records began in 2006.
The Office for National Statistics (ONS) defines consumer price inflation as the rate at which the prices of goods and services bought by households rises or falls. This is measured through tracking the price of a hypothetical basket of goods and services bought by households over time. Movements in the price of this hypothetical basket reflect the changing cost for buying the basket and in turn, the price differential provides a measure for an economy's rate of inflation. The ONS extended CPI to include owner occupiers' housing costs along with council tax and the resultant CPIH measure is reported by the ONS in tandem with CPI.
Inflation has been steadily increasing since last year and has done particularly since the UK's vote to leave the EU in June 2016. This vote caused a depreciation in the value of the pound and this, all else being held equal, would normally increase the price for import-sensitive goods and increase the price of those goods in the hypothetical basket. While this has been seen in some sectors, it has been apparent in others that, in the short-term at least, some businesses have limited the extent to which these costs have been passed on to the consumer through the cushion of the performance of prior hedging instruments.
Despite this, UK inflation remains high and continues to exceed the target 2.0% level, exceeding the inflation rates of most other European countries including the larger western European countries at this time. Should inflation breach 3.0%, the Bank of England will be required to write a letter to the UK government.
If inflation remains high, the squeeze on households will persist and with wage inflation low, the level of disposable income for families becomes an increasing concern. The Government today announced an end to public sector pay cap's, announcing a 1.7% annual pay rise for prison officers and a 2.0% pay rise for police officers for the current year. For others, the squeeze continues, exerting more pressure on the Bank of England to tighten monetary policy.
Prices of clothes and footwear do tend to rise at this time of year between July and August as retailers change from their summer to autumn ranges. Despite this, the rise this year between July and August 2017 was 2.4%, as opposed to 1.0% in the same period in 2016. This was mainly led by price increases in women's clothing. The higher price increase could be due to a fall in the proportion of items included in the summer sales but is more likely to be due to the sector being one of the most import-intensive, which will undoubtedly have been impacted by the continued weakness of sterling.
The Bank of England's Monetary Policy Committee meets this week to decide whether or not to raise interest rates. Michael Saunders and Ian McCafferty have voted to increase interest rates at recent meetings but the majority has voted to maintain bank rate at 0.25%. In a recent speech in Cardiff, Mr Saunders cautioned his fellow committee members in their delay for action, indicating instead that it was better for the central bank to take action sooner rather than later in a slow and gradual manner to be able to view and observe the effects in parallel. Any further delay, according to Mr Saunders, would remove the committee's ability to do so where action may alternatively be forced upon them.
It is expected in Thursday's minutes that the Bank of England will increase warnings that interest rates should be expected to increase, in the face of rising inflation coupled with strong economic indicators including the lowest unemployment level for forty years. However, a rate rise would shock the markets this week who are pricing in for interest rates to remain at 0.25% for the rest of the year.
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