Saturday , 18 November 2017
UK prepares for rising inflation

UK prepares for rising inflation

UK inflation is expected to hit a five-year high this week, outstripping growth in pay packets and putting renewed pressure on the Bank of England to raise interest rates.

City economists forecast that the consumer price index (CPI) will be shown to have risen to 3% in September, up from 2.9% a month earlier, its highest level since 2012.

The Office for National Statistics (ONS) will release its figures on Tuesday, just before an influential committee of MPs is set to question the Bank’s governor, Mark Carney, and other officials involved in setting interest rates.

The expected increase in the squeeze on living standards comes as the weak pound pushes up the cost of imported fuel, food and raw materials. Sterling slumped following the Brexit referendum in June 2016, and is still worth 14% less against the euro and 10% less against the US dollar than before the vote.

Some economists predict September’s CPI inflation rate could hit 3.1%. If so, Carney would have to write a letter to the chancellor, Philip Hammond, explaining why it had moved more than a percentage point from the Bank’s 2% target.

Threadneedle Street’s first interest rate hike in a decade could come as early as next month, which could help to keep inflation in check and strengthen the pound. That might help households’ purchasing power, but their borrowing costs would also rise.

Carney is due to appear before the Commons Treasury select committee on Tuesday morning after the inflation figures are released. The committee is also due to question two new members of the Bank’s monetary policy committee – the former treasury official Dave Ramsden and the economics professor Silvana Tenreyro.

Economists at HSBC expect two rate hikes from the Bank, one in November and another in May next year. They estimate this could reduce annual average inflation to 2.5% from a previous forecast of 2.9%.

Last month’s inflation figures are of key importance because they are used by the government to calculate increases in the state pension and other benefits for the next year.

The increases form part of the government’s triple lock guarantee, which ensures that state pensions will rise either by a minimum of 2.5%, the inflation rate or the rate of average earnings growth, whichever is largest. Theresa May proposed scrapping the guarantee during the general election campaign, but the idea were dropped as part of the government’s “confidence and supply” deal with the Democratic Unionist party.

September’s inflation figures are also important because they are used to set the taxes companies pay in the form of business rates. The levy on firms’ premises is set on last month’s retail prices index (RPI), which is typically higher than the CPI. City economists expect RPI to increase to 4%, up from 3.9% in August.

The government plans to switch the calculation of business rates from the RPI to the CPI from April 2020, saving companies millions of pounds.

Hammond has faced stiff lobbying from firms to bring the change forward, and the CBI will call on Monday for the government to make it part of a package of measures designed to make Britain more attractive for firms as uncertainty about the impact of Brexit grows.

The CBI also wants new plant and machinery investments to be exempted from rates bills. “Short-term actions, such as accelerating business rate reforms, should be coupled with a longer-term vision for tax policy providing the certainty companies crave,” said the group’s director general, Carolyn Fairbairn.

“That’s why for things under the chancellor’s control, we need to get on with them.”

The British Retail Consortium said it expected a 4% increase would add about £250m to retailers’ business rates bills next year. Helen Dickinson, the body’s chief executive, said Hammond should scrap the increase for next year in his budget next month.

The anticipated surge in inflation comes as concerns grow about the overall health of the economy, fuelling calls for the Bank to keep interest rates on hold. British GDP growth is forecast to trail Italy and Germany next year, according to estimates from the Organisation for Economic Cooperation and Development.

The EY Item Club said on Monday that the Bank should keep interest rates on hold until late 2018 to avoid weakening the fragile economic outlook, while it also anticipates inflation will reduce next year.

Howard Archer, the chief economic advisor to forecasting group, said: “We are far from convinced that raising interest rates this year is the recommended course of action.”

The Guardian

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