UK consumer price index figures have risen to 0.5 per cent, a trend that is set to continue as the impact of sterling’s weakness kicks in over the months following the UK’s decision to leave the European Union.
Data from the Office of National Statistics shows UK inflation increased to 0.5 per cent in June compared to 0.3 per cent a month earlier, with airline and oil costs partly driving the rise.
Following Brexit, IHS Global anticipates inflation will reach 1.5 per cent by the end of the year reaching a peak of 3 per cent in late 2017.
Chief UK and European economist Howard Archer says consumer purchasing power will be diluted in the months ahead.
“Companies may well look to clamp down on workers’ pay as they strive to save costs in a more difficult environment and as imported input prices are lifted by the weakened pound.
“Meanwhile, a likely softening labour market and reduced consumer confidence will dilute workers’ ability and willingness to push for higher pay awards.”
While the Bank of England has an inflation target of 2 per cent, Archer says the monetary policy committee will likely view a spike in inflation as a “temporary phenomenon”.
Russ Mould, investment director at AJ Bell, says: “If a central bank is determined to defend a currency it will usually raise interest rates, to provide a higher yield and tempt investors with higher compensation for the risks involved, but on this occasion the Bank of England Governor is talking about interest rate cuts.
“All eyes are now on the next Bank of England meeting on 4 August, when a rate cut and addition to the £375 billion Quantitative Easing programme will come under discussion once more.”