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Peer2Peer Finance News | July 27, 2017

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Why the latest inflation figures are not good news

Why the latest inflation figures are not good news
Staff
  • On November 16, 2016

CONTRARY to expert projections, the rate of inflation actually fell to 0.9 per cent in October, from one per cent the previous month.

This came despite a multitude of warnings from economists and analysts claiming that inflation would hit 1.2 per cent, and just keep on rising. Food prices and the rising cost of petrol were among the issues blamed for driving up the value of our basic goods, and consumers were told that the combination of high inflation and low interest rates would drive down the value of their savings.

So is it a case of experts getting it wrong once more, or is the worst yet to come?

A bit of both.

This week’s inflation news was largely down to cheaper clothing prices and these bargains are not likely to last for long. While the bottom line inflation figures grabbed all the headlines yesterday, the Office of National Statistics was steadily issuing a ream of information which helped to create a more complete picture of the UK’s finances. Most significantly, input prices rose 12.2 per cent in the year up to October, from 7.3 per cent in September. This means that manufacturers are suddenly spending a lot more on their raw materials than they were just six weeks ago and they will have to pass these extra costs onto consumers sooner rather than later.

Furthermore, inflation figures have not yet accounted for the ongoing weakness of the pound and the so-called ‘Brexit tax’ which has been threatened by food manufacturers such as Unilever and Walkers.

Following the release of the Bank of England’s inflation report, Governor Mark Carney told the Treasury Select Committee that Britain is suffering a “slow motion slowdown”, rather than a sharp adjustment, while Richard Wazacz of Octopus Choice described the looming inflation storm as “death by a thousand cuts”.

“Inflation may have nudged down slightly in the year to October but it’s very likely a temporary blip on an otherwise upwards trajectory,” said Wazacz. “The real worry for savers is in what lies ahead due to the sharp fall in sterling seen in recent months. The depreciation of sterling has not yet fed through but few deny it’s coming.”

Meanwhile, ThinCats’ Kevin Caley, said that “we still face the prospect of inflation climbing to 2.7 per cent in 2017.”

He added: “This will be a double-blow for anyone relying on their savings or investments to sustain them, especially pensioners living without an inflation linked income. When price rises do kick in, likely before Christmas, people will face increased costs and meagre interest on any savings they keep with the bank.”

Most economists are still projecting that inflation will surpass the Bank of England’s two per cent target at some point in the next year and some have even suggested that it may rise as high as four per cent, depending on the strength (or weakness) of the pound.

This means more uncertainty for the average saver in the short term and losses on savings in the long term, as Brits are forced to make their money stretch further and seek out higher-interest savings accounts and investments.

While we may have been offered a brief reprieve, inflation now has nowhere to go but up.