UK inflation remains at 3% as living standards squeeze continues | Business


Expectations dashed that rate would fall as effects of Brexit vote on pound fade

A basket of goods in a supermarket

Inflation in UK food prices appears to be slowing.
Photograph: Matt Cardy/Getty Images

UK inflation stuck at its highest level for almost six years last month, continuing the squeeze on household budgets.

The consumer prices index (CPI) held steady at 3% in January for the second month running, according to the Office for National Statistics, confounding economists’ expectations that the rate would fall to 2.9% as the effects of the post-EU referendum drop in the pound begin to fade.

The reading comes after the Bank of England stoked speculation about a rise in interest rates from as early as May by suggesting last week that it would need to increase the cost of borrowing somewhat earlier and to a greater extent than previously expected. The figures show CPI sticking stubbornly above the Bank’s target rate of 2% set by the government.

Inflation is when prices rise. Deflation is the opposite – price decreases over time – but inflation is far more common.

If inflation is 10%, then a £50 pair of shoes will cost £55 in a year’s time and £60.50 a year after that.

Inflation eats away at the value of wages and savings – if you earn 10% on your savings but inflation is 10%, the real rate of interest on your pot is actually 0%.

A relatively new phenomenon, inflation has become a real worry for governments since the 1960s.

As a rule of thumb, times of high inflation are good for borrowers and bad for investors.

Mortgages are a good example of how borrowing can be advantageous – annual inflation of 10% over seven years halves the real value of a mortgage.

On the other hand, pensioners, who depend on a fixed income, watch the value of their assets erode.

The government’s preferred measure of inflation, and the one the Bank of England takes into account when setting interest rates, is the consumer price index (CPI).

The retail prices index (RPI) is often used in wage negotiations.

The ONS said there was downward pressure on inflation from a slower pace of increase in the cost of fuel from a year ago, but there was a smaller than expected fall in the cost of entry to attractions such as zoos and gardens. It also said that after rising strongly since the middle of 2016 around the time of the Brexit vote, when the weak pound pushed up the cost of imports to Britain, food price inflation now appeared to be slowing.

Nikesh Sawjani, an economist at Lloyds Bank, said the unchanged CPI reading showed the downward trend in inflation was likely to be very gradual. “Over the coming months, as the fading impact of previous sterling weakness unwinds, domestic inflation pressures are expected to build,” he said.

UK inflation and wage data
UK inflation and wage data

Economists are looking for evidence of increasing wage growth from official figures due to be released next week, which could put further upward pressure on the cost of living as companies increase their prices to accommodate higher wage bills. Mark Carney, the Bank’s governor, has said inflation could rise above 3% over the coming months.

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The ONS also said house prices rose by 5.2% across the country in December from a year earlier, showing a gradual acceleration from November when the annual rate stood at 5%. The reading, however, remains below the average growth rate seen between 2014 and 2016 after a slowdown took hold after the Brexit vote.

London had one of the lowest growth rates throughout 2017, at 1.8%. In contrast, the West Midlands and east Midlands grew by 7.0% and 7.4% respectively last year.


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