Cascade Commentary

Inflation, measured using the Consumer Prices Index, was 3.0% year-on-year in October 2017, unchanged from September 2017. This was 0.10% lower than prior consensus forecasts. Prices for food and soft drinks increased 0.40% between September 2017 and October 2017 (compared to a fall of 0.50% in the same period in 2016) raising food prices by 4.2%, marking the largest upward contribution. Package holidays rose by 0.40% during the same period, having fallen by 0.40% in the same period last year. Rising food prices were offset by the fall in the cost of motor fuels as fuel prices fell 0.40%, having rose 2.3% this time last year. 

City analysts had previously thought that inflation would breach 3.1% this month, which would have required the Governor of the Bank of England to write a letter to the Chancellor to explain why inflation had moved more than 1.0% above the targeted 2.0% rate. Some have now begun to speculate whether UK prices have now peaked as inflation remained steady at 3.0%. 

In attempts to restrain rising inflation, the Monetary Policy Committee (MPC) increased the official bank rate from 0.25% to 0.50% earlier in November and have since signalled an expectation that at least two further rate hikes will be required over the next two years to help bring inflation back to the 2.0% target. With inflation remaining unchanged, many now expect for interest rates to remain unchanged at the MPC's next meeting in December 2017.

Wage growth has failed to keep up as prices have continued to rise and consumers will continue to feel cash-strapped as the squeeze persists. Research indicates that higher food prices due to costly imports and higher world food prices have resulted in many consumers streamlining other areas of spending. This has led non-food retailers to offer bargains as they compete harder for sales. It's important to note that while overall inflation has remained steady, the determinants are changing and with food prices rising sharply, it will be the poorer families that are hardest hit. 

Cascade Commentary

The June 2016 vote to leave the European Union caused a sharp devaluation in pound sterling and this has been attributed as a major determinant of the subsequent rising inflation. The devaluation of pound sterling has meant that the price of imported goods has increased and this has gradually fed into household prices. Many now feel that any current impact should cease in 2018 which will alleviate some of the upward pressure on prices. However this does not help retailers in the interim. As we approach Christmas, rising food prices are impacting retailers' golden quarter with many needing to trim prices and offer bargains as they work to meet sales targets. This in turn may affect corporate growth rates in 2018. 

Inflation remaining steady at 3.0% will likely lead the MPC to act cautiously and we expect, based on current information, for interest rates to remain unchanged in the December meeting. Data on company costs are showing signs that they peaked earlier in 2017 and as consumer prices tend to follow, we may see inflation settle as we begin 2018. 

The impact of higher inflation has gradually fed into savings rates over 2017 as depositors expected short-term rate hikes from the Bank of England that required deposit-takers to increase their rates to encourage deposits. Savings rates have largely remained unchanged since the base rate increase with many providers having already priced in November's rate rise. We have seen interest rates increase over the course of the year with some rising by up to 0.75%. As an example, personal instant access rates began the year at 0.85% and currently sit at 1.60% for branch only accounts and 1.32% for unrestricted accounts.

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