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UK inflation hits 7%

The latest ONS figures show inflation rising to 7% in March, up from 6.2% in February. Here, seven investment and finance experts comment on these figures:

Sarah Pennells, Consumer Finance Specialist at Royal London, says: “Today’s inflation figures don’t take into account the rise in the energy price cap, which took effect at the start of April, suggesting tougher times lie ahead. Even so, the fact that the cost of living is rising by 7% a year is causing real anxiety among many UK adults. The extra squeeze on household budgets – whether that’s higher prices in the shops or at the petrol pumps – not to mention the National Insurance rise, is forcing many to question just how they make ends meet.

“We know that people on a lower income spend more of their money on the basics, such as food and energy, so their ability to cut back to cope with rising prices will be very limited. And in the week when the state pension rose by just 3.1%, those who rely on it for the bulk of their income in retirement will wonder how their finances will stretch, as inflation reaches a level they last encountered in the 1990s.

“Similarly, workers will be dismayed that their pay isn’t keeping up with inflation, meaning they’re suffering from real-term cuts in their pay packets.

“Data from the UK’s saving ratio also shows just how hard the cost of living is biting as UK households spend more and save less. During the pandemic, millions of us became ‘accidental savers’, but inflation is forcing us to become ‘accidental spenders’ as rising costs take an ever increasing chunk of household budgets.

“Unfortunately, there’s no let-up around the corner with the Bank of England not expecting inflation to return to its target level of 2% until 2024 or 2025.”

Sarah Giarrusso, Investment Strategist at Tilney Smith & Williamson, the leading wealth management and professional services group which is set to re-brand to Evelyn Partners this summer, comments: “UK March annual CPI inflation came in above expectations at 7% (consensus: 6.7%) versus 6.2% previously. The underlying core CPI inflation (excluding energy, food, alcohol and tobacco) also surprised on the upside and increased to 5.7% (consensus: 5.4%) versus 5.2% previously.

The annual headline inflation continues to reach new 30 year highs. Food and non-alcoholic beverages rose by 5.9% over the year and clothing and footwear continued to increase at a 12-month rate of 9.8%. Services also saw another leg up this month, however, goods inflation is still outpacing that of services. Within services a large contribution came from restaurants and hotels, increasing 6.9%, the main driver being accommodation services. Price rises in electricity, gas and other fuels are still on an upward trajectory rising 24.7%.

Out of the major categories transport was the largest contribution to inflation this month increasing 13.4% year over year. This was largely driven by the increase in fuel prices. Last year in March 2021 the average petrol price was 123.7 pence per litre, however, this figure has surged to 160.2 pence per litre currently. The annual motor fuel inflation rate of 30.7% is the highest rate since the series began in 1989.

The increased cost of living is a key concern as real wages continue to be squeezed. Given this headwind growth is likely to decelerate from here and forecasts for the UK economy have been revised down. However, there are still some positive signs for the economy. The labour market has recovered strongly since the height of the pandemic. More jobs have now been added than were lost in that period and the unemployment rate fell further in this month’s data release to 3.8%, back to the pre-pandemic level.

This tightness in the labour market coupled with high inflation has underpinned the Bank of England’s decision to tighten monetary policy. The Bank has made three consecutive interest rate hikes and continues to emphasise its commitment to price stability. This has brought the base rate up to 0.75% and market expectations are for the rate to reach 2% by the end of this year. However, the effect the elevated cost of living on the real economy represents a risk to this trajectory.

UK March annual CPI inflation came in above expectations at 7% (consensus: 6.7%) versus 6.2% previously. The underlying core CPI inflation (excluding energy, food, alcohol and tobacco) also surprised on the upside and increased to 5.7% (consensus: 5.4%) versus 5.2% previously.

The annual headline inflation continues to reach new 30 year highs. Food and non-alcoholic beverages rose by 5.9% over the year and clothing and footwear continued to increase at a 12-month rate of 9.8%. Services also saw another leg up this month, however, goods inflation is still outpacing that of services. Within services a large contribution came from restaurants and hotels, increasing 6.9%, the main driver being accommodation services. Price rises in electricity, gas and other fuels are still on an upward trajectory rising 24.7%.

Out of the major categories transport was the largest contribution to inflation this month increasing 13.4% year over year. This was largely driven by the increase in fuel prices. Last year in March 2021 the average petrol price was 123.7 pence per litre, however, this figure has surged to 160.2 pence per litre currently. The annual motor fuel inflation rate of 30.7% is the highest rate since the series began in 1989.

The increased cost of living is a key concern as real wages continue to be squeezed. Given this headwind growth is likely to decelerate from here and forecasts for the UK economy have been revised down. However, there are still some positive signs for the economy. The labour market has recovered strongly since the height of the pandemic. More jobs have now been added than were lost in that period and the unemployment rate fell further in this month’s data release to 3.8%, back to the pre-pandemic level.

This tightness in the labour market coupled with high inflation has underpinned the Bank of England’s decision to tighten monetary policy. The Bank has made three consecutive interest rate hikes and continues to emphasise its commitment to price stability. This has brought the base rate up to 0.75% and market expectations are for the rate to reach 2% by the end of this year. However, the effect the elevated cost of living on the real economy represents a risk to this trajectory.”

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