Has UK inflation peaked at 2.3%?

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Analysts are split on whether UK inflation has peaked as the ONS confirms that it remained at 2.3 per cent in March, the same level as a month earlier.

Sterling weakness and rising oil prices have seen inflation shoot up from 0.9 per cent last October. It jumped to 2.3 per cent in February, its highest level since September 2013.

Inflation has “probably peaked for now”, according to WisdomTree director of research Viktor Nossek, but Royal London Asset Management economist Ian Kernohan and IHS Markit chief economist for the UK and Europe Howard Archer disagree.

Both argue Easter has influenced today’s figures because it occurs in April this year rather than March and therefore price hikes in air and sea transport, package holidays and hotels will be pushed back to next month’s figures.

“While the impact of rising oil prices last year is now fading, the full impact of Sterling’s devaluation is still feeding through, Kernohan says. “We would expect the air fare effect to reverse next month, and CPI to move higher, further above the 2 per cent target.”

Archer agrees that sterling weakness will continue to feed through and predicts it will peak around 3.3 per cent early in 2018.

But Nossek only sees three key risks to his view that inflation has peaked with the first being that the pound devalues significantly from current levels.

“With Brexit uncertainty already priced in, however, we would need to see a catastrophic breakdown in the EU27 trade talks for sterling to fall much further from here.”

Alternatively Nossek warns on oil breaking $60 a barrel, but says Opec cuts have lost the power they once had.

“Every time the price moves higher, US shale producers raise output. Unless this constant counterbalance is disrupted, the oil price will remain broadly static.”

Finally, Nossek suggests the UK could shift from ‘bad’ inflation, driven by a weaker pound and higher energy costs, to ‘good’ inflation, which is currently creeping up in the US due to increasing wages and a stronger labour market.

However, Nossek warns: “This would require higher household consumption, and unless employment outstrips expectations and wages grow, it appears doubtful.”

Despite rising inflation being uncomfortable for the Bank of England, as well as consumers, Archer expects interest rates to remain at 0.25 per cent through 2017 and 2018 at least. 

“We suspect that any Bank of England temptation to raise interest rates will be tempered by mounting evidence of a slowing UK economy as consumers rein in their spending and business caution mounts.”

Supermarkets find creative responses to weak sterling

Today’s figures come as supermarkets up the prices of items such as lightbulbs, dental floss and aubergines, which are less price sensitive than items like milk, in an effort to pass on Brexit-induced costs.

Light bulbs were up 19 per cent, dental floss increased by 17 per cent and aubergines 13 per cent, while 2.3 litres of milk costs £1 across all major supermarkets, Bloomberg reports.

Shoppers are more likely to base their perceptions of a supermarket’s value for money on everyday items like milk, grocery consultants say.