Inflation surge tightens screws on cash-strapped households
Rising clothing and fuel prices caused inflation to rebound last month, intensifying the squeeze on households grappling with low wage-growth.
Figures from the Office for National Statistics (ONS) showed the Consumer Price Index (CPI) measure of inflation was 2.9% in August, outstripping economists’ expectations of 2.8%.
It brings an end to a momentary pause in June and July at 2.6%, and matches levels seen in May this year and June 2013.
CPI was last higher in April 2012, when the rate reached 3%.
Sterling built on earlier gains following the news and was up 0.7% against the dollar at 1.32.
Against the euro, the pound rose 0.6% to €1.10.
Mike Prestwood, ONS head of inflation, said: “Clothing prices rising faster than last year, along with a hike in the cost of petrol, helped nudge inflation upwards.
“Conversely, these effects were partially offset by air fares, which rose more slowly than during last year’s summer holidays.”
The main upward pressure came from clothing and footwear prices, which climbed to their highest level since official records began at 4.6% year-on-year in August.
On a monthly basis, clothing and footwear rose 2.4% after a smaller hike of 1% between July and August in 2016. The move was partly driven by rising import costs for retailers linked to sterling’s slump following the Brexit vote.
The ONS added: “The increase in clothing price inflation may be partly associated with the lagged response to the depreciation of sterling during 2016 as supply contracts with overseas producers may now be renewed on different terms.”
Motor fuels were also pushing the overall cost of living higher, with fuels and lubricants rising 1.6% month-on-month in August following a 1.3% fall last year.
The price of petrol rose by 1.8p a litre to 115.7p in August, while diesel picked up by 2p to 117.6p.
However, downward pressure came from air fares, which saw smaller hikes between July and August at 10.9%, compared to a 14.4% monthly jump in 2016.
The Bank of England is predicting CPI to peak at around 3% in October, higher than its target of 2%.
Governor Mark Carney warned last month that the pressure on families would continue for the next few quarters.
Households have seen their spending power diminish as wage growth tracks below inflation.
Previously announced figures from the ONS show annual growth in wages, both including and excluding bonuses, grew by 2.1% for April to June.
The Consumer Price Index including owner-occupiers’ housing costs (CPIH) was 2.7% in August, up from 2.6% the month before.
CPIH is the ONS’ preferred measure of inflation, which includes costs associated with living in, maintaining and owning a home.
The Retail Prices Index, a separate measure of inflation, was 3.9% last month, rising from 3.6% in July.
A Treasury spokesman said: “We know some families have concerns with their day-to-day cost of living.
“That’s why we are boosting takehome pay with tax cuts for over 30 million people and a National Living Wage that is giving the lowest earners their fastest pay rise for 20 years.”
Sir Vince Cable, leader of the Liberal Democrats, said: “Rising inflation shows how urgent it is to address the sense of unfairness around the pay cap.
“With these numbers, our nurses, teachers and other public sector workers will experience a 2% pay cut in the coming year. This will only aggravate the recruitment and retention crisis we are facing.
“The Government must take urgent steps to lift the pay cap for all public sector workers, and increase wages in line with inflation.”
Howard Archer, chief economic adviser to EY ITEM Club, said: “Inflation now looks likely to move just above 3% in the near term, but there remains a good chance that this will be the peak, barring sustained renewed sterling weakness. In fact, sterling has strengthened in recent days. The [Bank’s] MPC will likely warn on Thursday that any sustained sterling weakness will increase inflation risks and could prompt an interest rate hike sooner rather than later.
“The MPC may also well warn once again that interest rates are likely to rise earlier and a little faster than markets currently expect and indicate that businesses and consumers need to take this possibility on board.”
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “August’s CPI inflation rate exceeds the MPC’s 2.7% expectation in last month’s inflation report and increases the risk that the committee intensifies its rhetoric regarding future interest rate rises later this week.
“We still think, however, that the chances of a rate rise this year are remote. Domestically-generated inflation is subdued, inflation expectations have remained wellanchored and GDP growth is too weak to warrant higher rates.”