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UK inflation to hit five-year high as airfare and fuel prices squeeze households

UK News | Published: | Last Updated:

The Bank of England’s inflation target is 2%.

Inflation is expected to surge to a five-year high when official figures are released next week as rising airfares, fuel and electricity prices ratchet up the financial pressure on households.

The Consumer Price Index (CPI) measure of inflation is forecast to come in at 3% for September, marking its highest level since April 2012 and on the cusp of forcing Bank of England Governor Mark Carney to publicly explain why the rate has risen to such an extent.

The Bank’s inflation target is 2%, and Mr Carney must write a letter to the Chancellor when inflation is more than 3% or less than 1%.

An Investec research note penned by chief economist Philip Shaw said: “Our calculations point to an uptick in CPI inflation to 3.0%, placing it right on the edge of the Monetary Policy Committee’s (MPC) tolerance threshold.

“That being said, we don’t discount the possibility that this limit will be breached, which would then require the Governor to pen an explanatory letter to the Chancellor at the next Inflation Report, explaining the more than 1 percentage point overshoot of the Bank of England’s inflation goal.”

Mark Carney
Bank of England Governor Mark Carney may be forced to pen a public letter to the Chancellor over inflation levels (PA)

The Bank has so far allowed CPI to run above target, as its upward move has been primarily driven by sterling’s post-Brexit vote declines, rather than a fundamental rise in costs.

Investec said it believes that while clothing prices are likely to have dropped in September – due to high comparable figures in the same month last year – transport costs will “more than offset this”.

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“In particular, the first wave of Ryanair flight cancellations came towards the end of the ONS’ survey week, which may have lifted the volatile air fares component by more than in the equivalent month last year as displaced passengers scrambled to book with alternative airlines,” Investec said.

Fuel prices are also expected to lift CPI – after Hurricane Harvey disrupted US oil production – adding to pressure from a 12.5% electricity price hike by British Gas that took effect mid-September.

There is growing speculation that the MPC could raise interest rates as early as November, particularly after minutes from its September meeting showed that all policymakers believed “some withdrawal of monetary stimulus was likely to be appropriate over the coming months”.

The MPC then raised the prospect of a potential rate rise in November, saying it would “undertake a full assessment of recent developments” at the time of its next quarterly inflation report.

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Experts have since forecast a further hike in early 2018.

But while an interest rate hike could go some way in reducing inflation, there are warnings that the UK economy is not yet strong enough to handle a rise.

Ratings agency S&P has said that rate hike talk by the likes of Mr Carney are primarily aimed at propping up the pound to reduce inflation pressure. While the Bank could usher in a November hike, S&P said any further moves in 2018 “do not appear warranted on the back of a slowing economy.”

The International Monetary Fund, which cut its forecast for UK growth this summer, recently raised the the growth outlook for every advanced economy aside from Britain amid Brexit uncertainties, raising further fears over domestic performance.

Chancellor Philip Hammond has also been downbeat on Britain’s growth prospects, noting that delays in talks on the future UK/EU trading relationship – caused by Brussels’ insistence that the divorce deal must be settled first – were creating a “cloud of uncertainty” which was acting as a dampner on the UK economy.

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