The Consumer Prices Index (CPI) rate of inflation rose from 1.8 per cent in the year to January to 2.3 per cent in the year to February, the Office for National Statistics (ONS) has today (21 March) announced.
February’s rate is the highest since September 2013, having steadily risen since late 2015.
The ONS says the increase has been driven by rising transport costs – in particular rising petrol and diesel costs – as well as increasing food prices.
The new Consumer Prices Index including owner-occupiers’ housing costs – called CPIH, which is not a National Statistic – also reported a 12-month inflation rate of 2.3 per cent in February 2017, up from 1.9 per cent in January.
‘Bank of England expected to hold interest rates’
The weak pound has been the main driver of rising levels of inflation, leading to higher import prices.
Although the vast majority of economic forecasters expect the bank rate to remain at its all-time low of 0.25 per cent this year, some commentators, including Kristin Forbes, a member of the Bank of England's nine-strong Monetary Policy Committee, have previously suggested that surging levels of inflation could lead to a hike in interest rates.
Ben Brettell, senior economist at Hargreaves Lansdown, does not belive a rate rise is on the cards. He says: ‘Bank of England policymakers predict inflation will peak at 2.8 per cent in the first half of next year, before a gradual fall back towards the 2 per cent target. Many economists forecast a much higher peak, with respected think-tank NIESR saying inflation will reach 3.7 per cent.
‘But despite elevated inflation, those hoping for higher interest rates are likely to be in for a long wait. The most recent Bank of England minutes note that to attempt to offset the effect of weaker sterling on inflation would come at a cost of higher unemployment. As such I expect the Bank to look through these higher numbers and keep bank rate at 0.25 per cent for the remainder of this year.’
The problem with rising inflation is that it erodes the real term value of savings, and with cash interest rates so low, savers may want to consider investing in order to beat rising inflation.
Maike Currie, investment director for personal investing at Fidelity International, says: ‘Inflation is a ‘Jekyll and Hyde’ character. It chips away at the value of money, which is good news for borrowers because this reduces the value of their debts. However, it also erodes the spending power of future interest and dividend payments and eats away at the worth of your original capital – bad news for savers and investors.
‘If you want to add some inflation protection to your portfolio, have a look at physical assets such as gold, agriculture and property - all good protectors against the wealth-eroding effects of inflation.’
Earlier this month as part of the Spring Budget the Office for Budget Responsibility (OBR) upped its economic growth forecast for 2017 year to 2 per cent, from 1.4 per cent. It also predicted inflation will peak at 2.4 per cent, rather than spiraling out of control.
Rising levels of inflation will put a squeeze on consumer spending, particularly against a backdrop of slowing wage growth. Currie adds with February’s inflation rate at 2.3 per cent and pay growth coming in at 1.7 per cent, real wage growth (that’s wage growth adjusted for inflation) has turned negative at -0.6 per cent.
‘This means our monthly pay check is not keeping up with the cost of living,’ adds Currie.
‘If inflation continues to tick up and wage growth remains lackluster, we will all be getting progressively poorer as each month rolls round. This squeeze on the UK consumer is bad news because consumer spending is the backbone of the UK economy.’
This article was written for our sister website Moneywise.