Households will feel the pinch—and the Brexit vote is partly to blameby Duncan Weldon / April 13, 2017 / Leave a comment
Inflation in the UK is back. CPIH (the Bank of England’s new target, a measure of consumer prices which includes a measure of housing costs) rose by 2.3 per cent in the year to March, having been as low as 0.2 per cent just 18 months ago.
2.3 per cent was also the rate of increase in the year to February, but that pause in inflation’s rise looks to be a blip driven by the timing of Easter (which impacts considerably on flight costs). The upward ascent will likely continue in the months ahead.
Partially this reflects global factors. Inflation has been rising across the advanced economies in recent months. Commodity prices—especially oil—after a dramatic collapse in 2014-16 have rebounded, pushing headline inflation measures higher. The world economy seems to have a bit more spring in its step in general which tends to support higher inflation.
But alongside the global factors, the UK is experiencing some of the first direct economic impact of last June’s vote to leave the European Union. The large fall in the value of Sterling is pushing up the cost of imported goods as domestic suppliers react to the higher prices they now face. Input prices faced by UK producers are running at an annual rate of almost 20 per cent, a reflection of both the pound’s tumble and oil’s rise.
Where and when exactly inflation will peak is open to debate and much will depend on how the underlying economy—and in particular the labour market—performs. But inflation above 4 per cent within the next 12 to 18 months is no longer an outlandish forecast.
The Bank of England has so far been content to look through what it assumes will be a temporary overshoot of its inflation target. It ju…