UK inflation: Households are being squeezed
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:
Energy prices and sterling are driving inflation
"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.
Consumers feel the pinch
"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.
Easter effect on transport sector
"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.
Economy to slow as households cut back
"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."
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Notes to Editors
Important Information: The views and opinions contained herein are those of Azad Zangana, Senior European Economist & Strategist and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. The opinions in this document include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change.