Inflation hits four-year high of 2.9 per cent

Inflation hits four-year high of 2.9 per cent

Inflation is continuing to rise, with the consumer prices index reaching a four-year high of 2.9 per cent in May.

This marks a 0.2 per cent increase on April’s figure, with the falling costs of motor fuels failing to offset the rising cost of food, energy and recreational goods.

Ben Brettell, senior economist at Hargreaves Lansdown says that economists had expected inflation to remain steady at 2.7 per cent. 'The general mood on the economy has become one of caution over the past few weeks, with first-quarter GDP figures disappointing, consumer spending looking weaker and Brexit-related uncertainty looming large. However, growth is expected to pick up somewhat in the second quarter, and it looks like the election result could make for a "softer" Brexit, which could prove positive for the economy.'

Policymakers at the Bank of England (BoE) had expected inflation to peak just below 3 per cent towards the end of 2017, however the evidence now suggests that sharper increases should be anticipated. The BoE was far from alone in underestimating that inflation would rear its ugly head. Back in March, the Office for Budget Responsibility (OBR) said it expected inflation to peak at 2.4 per cent in 2017.

Brettell adds: 'Just one member of the Monetary Policy Committee, Kristin Forbes, has been voting for higher interest rates, and she leaves the Committee next month. The balance of probability suggests the Bank will continue to "look through" higher inflation and leave rates on hold to support the economy, but if inflation continues to surprise we could start to see members revising their positions.'

One of the biggest risks facing long-term savers and investors is the stealth tax that is inflation, which slowly but surely erodes the real value of your money over time. While cash may seem safe in uncertain times, over the long term most cash accounts fail to protect your money from losing its real value as inflation picks up.

- Are Brexit and inflation being underestimated?  

Consumers will feel the squeeze of rising inflation. According to number crunching by Retirement Advantage, UK households will have to find an additional £21.7 billion this year if they are to maintain last year’s standard of living.

Andrew Tully, pensions technical director at Retirement Advantage, says: 'Households across the UK will be left reeling from the latest inflation numbers. We are feeling the financial pressure of rising prices and flat wage growth, as evidenced by the slowdown in consumer spending and impact on living standards.'

However, he said that it’s retirees that are likely to be hit hardest. He adds: 'Cost of living rises can have a significant impact on people with fixed incomes, including retirees who typically live off pension income. Over the course of a 20-year retirement, if inflation averaged 2 per cent, the typical retired household would need to find a further £187 a week to maintain their standard of living.'

In other inflation news, the retail prices index (RPI) also rose from 3.5 to 3.7 per cent for the year to May. Although this is regarded as an outdated index and is not a national statistic it is still used for some government calculations.

The CPIH (Consumer Prices Index including Housing) measure of inflation rose from 2.6 per cent to 2.7 per cent. This is the Office for National Statistics' preferred measure of inflation, but this statistic does not currently meet international standards.  

- This article was originally written by our sister publication Moneywise.


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