EconomyMay 16 2017

Inflation hits 43-month high

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Inflation hits 43-month high

The UK inflation rate hit 2.7 per cent in April, up from 2.3 per cent in March, suggesting a continuing squeeze on household finances.

The Consumer Price Index (CPI) overshot the Bank of England’s 2 per cent target for the third month in a row, the Office for National Statistics reported today (16 May) leading some experts to believe that interest rates could rise sooner rather than later. 

“The Fed has already raised the US central rate and, despite a downgraded growth forecast in the UK economy, it may only take a more stable outlook after the general election for the Bank of England to follow suit,” said Nick Dixon, investment director at Aegon.

Although inflation is now at a 43-month high, economists said that it may not have peaked. 

“We believe inflation is likely to get up to 3 per cent later on this year and then hover around this level for a while, although we have trimmed the expected peak in inflation from 3.3 per cent due to a recent firming in sterling and some softening in oil prices,” said economist Howard Archer from IHS Global Insight.

Wage growth is only forecast to be 2 per cent for the year, so many people will find themselves struggling to pay the bills as prices increase, warned Calum Bennie, savings specialist at Scottish Friendly.

“Even Diane Abbott can work out that household finances are set to be squeezed for a considerable time to come.  

"Although putting money aside for the future is difficult during periods of constraint, it’s something we should strive to do in case the Bank of England does decide to raise interest rates in future to combat inflation," he said.

According to the ONS inflation was pushed up by Easter-related price hikes in April, which is traditionally when holiday businesses and airlines hike their prices to coincide with the holiday season.

However, there were also increases in the prices of clothing and electricity, with import prices rising due to the ‘Brexit Effect’, where goods cost more when imported because of the weak pound.

Savers were warned that high inflation rates mean the value of money in current accounts is being eroded.

"Rising inflation is bad for savers because high street interest rates are much lower, so cash savings are losing value every day.

"With inflation set to continue rising, savers need to take some risk to gain a decent return.” Chris Leyland, deputy chief investment officer at investment firm True Potential, said.

rosie.murray-west@ft.com