Economics

UK inflation breaches the BoE's upper target

Higher food and energy prices put further pressure on households ahead of festive period.

12 December 2017

Azad Zangana

Azad Zangana

Senior European Economist and Strategist

UK annual consumer price index (CPI) inflation rose to 3.1% in November - its highest rate since March 2012 and, more significantly, breaching the Bank of England’s upper target of 3%. The latest figures were higher than consensus expectations of 3%, with higher food and energy price inflation causing the upside surprise.

Bank of England Governor Mark Carney is now due to write a letter to the Chancellor to explain the reason for the overshoot, and what the Bank is doing to correct this.

The letter will undoubtedly mention the depreciation in sterling since the Brexit referendum, but also higher energy prices recently. The Bank raised interest rates in November, and has hinted that it will do so again two more times over the next three years.

Excluding the volatile energy and food sub-indices, core CPI inflation was unchanged at 2.7%, while the retail price index fell from 4% to 3.9%.

Squeeze on consumers continues

For the household sector, the rise in inflation will come as a blow ahead of the festive period, especially as wages are failing to keep up with inflation. The “Black Friday” sales events are barely visible in the data, suggesting less discounting than the hype.

Looking ahead to 2018, while we do expect some moderation in inflation, in the near-term, the shutdown of the Forties pipeline system has pushed the price of oil significantly higher. This is likely to feed into higher energy and transportation prices over the coming months, extending the squeeze on households.

Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change.  To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.