Inflation set to hit 3% before falling back in autumn 2013

Tuesday, 12 February 2013 04:47

By Ben Salisbury

Inflation remained at 2.7 per cent for a fourth consecutive month, according to official data from the Office for National Statistics (ONS).

This is the first time that inflation has been unchanged for four months in a row since records began in 1996, according to the ONS.

Economists believe inflation is set to reach three per cent in the coming months before falling back in the final quarter of 2013.

Oil prices reached an eight month high in February and food prices are likely to remain high because of the poor harvests last autumn.

A further near-term influence expected to keep inflation elevated is the weak performance of sterling which could push up the price of imported goods.

This means that inflation remains at its highest level since May 2012 and provides no respite for households as the rate of inflation is higher than the average increase in wages.

The latest data shows that annual earnings growth was around half this level at 1.3 per cent in November.

The consumer prices index (CPI) measure of inflation remained unchanged as upward inflationary pressures from alcohol and tobacco prices were pegged back by downward pressure from miscellaneous goods and services and clothing costs.

Alcohol and tobacco prices rose by 8.5 per cent. However, the single largest influence causing rising inflation comes from education which increased by 19.7 per cent year-on-year.

The 2.7 per cent rise means that the cost of goods and services has risen by 2.7 per cent from January 2012 to January 2013.

The Bank of England warned last week that it expects inflation to remain above its two per cent target for the next two years.

The central bank will publish its latest quarterly inflation report on Wednesday 13th February.

Matthew Renier, director, retirement planning specialists, Retire Right, warned households that high inflation is here for the foreseeable future.

He said: “Just as people need to brace themselves for a protracted low interest rate environment, so they need to accept that high inflation is here to stay for some time. The key is to navigate their household budgets through these twin threats as best they can.

"Even the Bank of England conceded last week that inflation has remained stubbornly high and could remain above target for two years.

The retail prices index (RPI) measure of inflation went up from 3.1 per cent to 3.3 per cent. The RPI includes the cost of renting and mortgage costs.

Surprisingly, higher energy prices were not a factor in keeping inflation at 2.7 per cent.

Howard Archer, Chief UK & European Economist at IHS Global Insight said: “The year-on-year increase in utilities prices eased back to 3.5% in January after rising to 3.9% in December despite some further rises in energy tariffs by utilities.”

Mr Archer believes that inflation is likely to rise to 3.0 per cent in the next few months.

He said: “It looks highly likely that consumer price inflation will reach 3.0% within the next few months and stay close to that level until the fourth quarter. Oil prices have hit a near eight-month high in February, while food prices look likely to stay relatively elevated in the near term at least due to recent poor harvests.”

Looking further ahead, Mr Archer said: “Consumer price inflation should start to head down in the final months of 2013, particularly as the impact of the sharp drop in university tuition fees drops out in October.

“Specifically, we see consumer price inflation down to 2.2% by the end of 2013 and it could finally dip below 2.0% in 2014.”

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