Posted on: 14-06-2017 in Investments
UK inflation hit its highest level for four years in May 2017. The figure stands at 2.9%. And this shock rises comes at a time when UK workers are already facing the “the biggest real wage squeeze in two centuries”, according to Sky’s Ed Conway.
Amit Kara of the National Institute of Economic and Social Research (NIESR) agrees that “this spike in inflation will exert further downward pressure on real household disposable income, at a time when wage growth remains modest, and in turn squeeze consumer spending.”
A spokesman for Fidelity International confirms that “rising prices coupled with lacklustre earnings growth means our wages aren’t keeping up with the rising cost of living. Our real income is being squeezed and we’re witnessing this impacting UK consumer spending, which fell for the first time in nearly four years in May as consumers tightened their belts.”
All spending categories reviewed by the Office for National Statistics showed rising prices for May 2017, except for transport (with UK fuel prices actually being cut by 2-3 pence).
The weak pound is the reason for the spike in inflation.
The weak pound has spiked the price of foreign imports – which means many products are more expensive (and that, in a nutshell, is inflation).
As a result of the inflation news, the pound slipped below $1.27 but quickly recovered its losses.
The pound has been on the slide against the US Dollar and the Euro for many years now. And Brexit uncertainty has made things worse.
Inflation is expected to rise to 3% this autumn (2017) and “very gradually” (says The Telegraph) fall back over the course of 2017. This current spike is down to the temporary impact of high import prices, the effect of which on inflation is expected to lessen.
Usually, if inflation is high, then the Monetary Policy Committee of the Bank of England, puts up interest rates. That – many pundits, both expert and amateur – is the Bank of England’s job, right?
But, despite the shock inflation news, the consensus is that the MPC will NOT put up interest rates.
Putting up interest rates theoretically helps consumers if inflation is rising. Sure, interest rates apply to loans we might take out as consumers, but they also apply to our savings in the bank. So higher interest rates mean that our savings grow quicker.
Blame Brexit! Everybody else does:
M&G UK Fund Manager Ben Lord is not alone in his observation that, “with such high uncertainty about the direction of travel into Brexit negotiations, but with very significant downside risks, it seems extremely unlikely the Bank of England will tighten policy at this point.”
The National Institute of Economic and Social Research agrees that “although inflation has surprised the Bank of England on the upside, we expect the MPC to look through this temporary spike in inflation and hold monetary policy stable until mid-2019.”
And a Lloyds Senior Economist, Rhys Herbert, supports the idea that it is “other pressures, including domestic political uncertainty” that encourages the Bank of England to “play wait-and-see”.
It’s all very well for us consumers to complain about the hardship caused by rising prices matched with appalling savings rates – but, with responsibility for the nation’s economy, the Bank of England has to be cautious above all else. (Not that this offers much consolation).
Well, it was looking at the UK housing market was in the doldrums. And the Hung Parliament was expected to add to the uncertainty depressing the market.
But new figures released by the ONS in the second week of June reveal that, although “there has been a gradual slowdown in the annual growth rate since mid-2016,” the average UK house price in April 2017 was a whopping £3k higher than the month before. London prices rose by 4.7% in April!
And, at £220k, the average UK house price was £12k higher than a year before. That’s an increase of a third of the average UK wage (which, depending on which statistics you believe, is somewhere around 30k.)
Up the creek without a paddle? Well, maybe.
Until we get a Government in place and Brexit sorted out, financial uncertainty is going to be the name of the game for everybody.