Belfast Telegraph

Spending power falls as inflation hits 2.9%

By David Elliott and John Collingridge

Disposable income is dwindling fast according to latest data which has shown the annual rate of price rises reached nearly 3%.


The Office for National Statistics (ONS) said Consumer Price Index (CPI) inflation hit 2.9% in June, up from 2.7% in May and the highest level since April 2012.

Although expected by economists, the increase is well above the Bank of England's inflation target of 2%, and is likely to worry the central bank's new govenor Mark Carney and hit consumer spending.

Behind the increase is a jump in the cost of motor fuel, clothing and footwear, although both the cost of transport and food fell.

The figures showed inflation continues to erode consumers' spending power and significantly outstrip wage rises, which increased by just 1.3% in the three months to April compared with a year earlier.

Price rises for personal care items such as moisturiser and deodorant, and increases in the cost of domestic heating fuel, also helped drive inflation higher.

But there were falls in the cost of potatoes, fruit, bread, cereals and dairy products, defying economists' expectations of price rises.

Air fares and package holidays also fell in June, compared with sharp increases in flight costs in May.

Price falls for sofa beds, carpets and settees also helped hold back inflation.

A Treasury spokesman said inflation is down significantly from its peak of 5.2% in 2011.

He added: "At the same time, to help families with the cost of living, the Government has increased the tax-free personal allowance to £10,000, which will take 2.4 million people out of income tax altogether and save a typical basic rate taxpayer almost £600, and frozen fuel duty, which has kept petrol prices 13p per litre lower than they would otherwise have been."

The figures from the ONS also showed that Retail Prices Index (RPI) inflation, which includes housing costs, rose to 3.3% in June from 3.1% in May.

Recently-launched experimental measures of inflation – CPIH, including housing costs, and RPIJ, which was created to iron out the gap formed by the different methods of calculating the price of goods – both stood at 2.7% in June.

A figure above 3% would have required Mr Carney to write to Mr Osborne explaining why inflation remains so high above target.

The Bank voted against increasing its £375 billion QE programme earlier this month.

Minutes of the meeting published tomorrow will show if Mr Carney followed his predecessor, Sir Mervyn King, in voting for more QE.

Separate data also showed that factory gate prices rose by 2% in the year to June.

Woe to consumers as CPI rate stays high

Dr Esmond Birnie, PwC chief economist in Northern Ireland for PwC

While June's 2.9% CPI inflation was less than expected it remains stubbornly above the Bank of England's 2% target.

Almost five years of above-target inflation has severely impacted workers' and households' purchasing power and is contributing to the sluggish economic recovery.

Looking to the future, we expect inflation to continue to run above the 2% target; back in May, the Bank of England said inflation would exceed its target until early 2016; and with oil prices steadily rising and sterling weakening against the dollar any quick fall in inflation towards the Bank's 2% target is unlikely.

This persistently higher than target UK inflation will continue to erode real household buying power and impact on consumer spending and ultimately slow any recovery.

Disposable income faces more pressure

Angela McGowan, Danske Bank Chief Economist

Although the edging up of inflation has been expected, it still doesn't take away from the fact that rising prices are putting downward pressure on households' disposable income.

The recent depreciation of sterling will not help this price index and in particular, sterling's fall relative to the dollar could continue to cause problems for petrol prices in the months ahead as oil is generally traded in dollars.

It is however highly unlikely that this week's inflation rise will change the Bank of England's view on economic policy.

The UK economy is showing signs of recovery but it is still not strong enough for the Bank of England to tighten interest rates or pull back on other forms of stimulus.

Interest rates are expected to stay low for an extended period and the Bank of England and households will be expected to take a little inflation rise on the chin until the recovery is truly embedded.

Belfast Telegraph