Schroders: UK inflation hike puts pressure on households

Higher food and energy prices put further pressure on households ahead of the festive period, comments Azad Zangana, Schroders’ Senior European Economist.

UK annual Consumer Price Inflation (CPI) rose to 3.1% in November – its highest rate since March 2012, and more significantly, breaching the Bank of England’s (BoE) upper target of 3%. The latest figures were higher than consensus expectations of 3%, with higher food and energy price inflation causing the upside surprise. BoE Governor, Mark Carney, is now due to write a letter to the Chancellor to explain the reason for the overshoot, and what the Bank is doing to correct this.

The letter will undoubtedly mention the depreciation in sterling since the Brexit referendum, but also higher energy prices recently. The Bank raised interest rates in November, and has hinted that it will do again two more times over the next three years.

Excluding the volatile energy and food sub-indices, core CPI inflation was unchanged at 2.7%, while the retail price index fell from 4% to 3.9%.

Squeeze on consumers continues

For the household sector, the rise in inflation will come as a blow ahead of the festive period, especially as wages are failing to keep up with inflation. The ‘Black Friday’ sales events are barely visible in the data, suggesting less discounting than the hype.

Looking ahead to 2018, while we do expect some moderation in inflation, in the near-term, the shutdown of the UK North Sea’s main pipeline system for emergency repairs has pushed the price of oil significantly higher. This is likely to feed into higher energy and transportation prices over the coming months, extending the squeeze on households.

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