The annual rate of consumer price index (CPI) inflation rose from 2.3% in March to 2.7% in April – higher than consensus estimates of 2.6%.
Meanwhile, the retail price index (RPI) measure of inflation jumped from 3.1% to 3.5% over the same period, also slightly higher than consensus expectations. This is more bad news for households, according to Azad Zangana, Schroders’ Senior European Economist said “Inflation has been rising in recent months due to energy price inflation dynamics, but also the fall in sterling, which is raising the prices of imported goods and services. According to the latest producer price index data, input prices are still rising by 16.6% year-on-year, although that is down from the peak in recent months. The input price data suggests that producers have seen the peak in the cost inflation that they face. Over the coming months, most of those costs will be passed on to consumers, most likely in the form of higher final prices, which will of course drive measures like the CPI and RPI higher still. In fact, the Schroders forecast has headline UK CPI inflation rising above 3% by the end of the summer, before slowly coming back down over the second half of the year.
“Meanwhile, households are being squeezed. This was evident from the weakness in retail sales, and was hinted at by the fall in GDP growth published last month, with many of the consumer-facing sectors struggling. Indeed, governor of the Bank of England, Mark Carney, warned that average pay growth was unlikely to keep up with headline inflation in the near-term, but could catch-up sometime next year. He mentioned Brexit uncertainty as a possible reason for subdued wage growth, but he thinks this could fade over time.
“Within the details of the report, the biggest contribution came from transport price inflation, where prices rose by 1.5% in April 2017 compared to a fall of 0.1% in April 2016. This is due to the changing month of the Easter holiday, which usually leads to a big jump in air fares and other transport prices. Otherwise, clothing and footwear inflation rose by 1.1%, compared to a fall of 0.3% a year ago. To the downside, recreation and culture services inflation rose 0.2%, compared to 0.8% a year earlier – this could be a result of households cutting back on discretionary spending.
“Overall, a small upside surprise to inflation, which does not change the story for the UK economy. Inflation is heading higher from here which will squeeze households further. With the savings rate at a record low, households are very likely to cut back spending, causing the economy to slow.”
Mike O’Connor, Chief Executive of StepChange Debt Charity, said: “Today’s figures will mean even more pressure for the millions of households already struggling to make ends meet. Rises in the cost of living combined with the expected slow-down in wage growth will put stretched household budgets under further strain and expose many to a greater risk of debt problems. Around 8.8 million households are already using credit to cover their basic living expenses, but tougher economic conditions means that this figure is likely to rise.
“Headline inflation might be pushed up by short term factors, but the underlying reality is that basic costs are going up for many families. Hardest hit will be those with least resilience, and for many it will be harder to avoid debt problems in future.
“The issue of problem debt is one that needs to be taken seriously by politicians of all parties. It’s a problem that costs the UK an estimated £8.3bn . We need to see fewer people falling into problem debt and problem debt causing less harm when it does strike.”