UK inflation will continue heading higher – Fidelity

Anna Stupnytska, Global Economist at Fidelity International, notes that the UK headline CPI inflation was 0.6% year-on-year in July, up from 0.50% in June.

Key Quotes

“UK inflation should continue heading higher in the coming months, as the weak pound pushes up the cost of imports further. The extent of sterling depreciation seen thus far, around 18% in trade-weighted term since the end of 2015, could boost inflation by more than 1%, with the peak likely to occur in 2017.

“As the Bank of England announced in August, they are intending to look through higher inflation overshooting the target of 2% and keep monetary policy loose to help the economy navigate through the Brexit-related uncertainty. For savers, this results in a ‘double whammy’, as rising inflation and falling yields eat away their savings. For consumers, rising inflation will lead to higher spending on everyday items including food.

“This reflects further bad news for the UK economy, with NIESR estimating a 0.2% month-on-month contraction in GDP for July (around 2% annualised). While this remains only an estimate for now, we begin to get the first hard data on the economy later this week, with the release of the unemployment report on Wednesday and retail sales on Thursday. I expect the hard data to start picking up the collapse in confidence survey in the aftermath of the referendum, at least to some extent. With the Brexit negotiations likely to last for some time, the related drag on growth will weigh on the economy over the next few months, despite the easy monetary policy and a potential fiscal boost likely to be announced in the Autumn budget.”

Fidelity International’s Generational Inflation Barometer

While the average inflation rate for the UK stands at 0.6%, it pays to look at what lies behind this headline figure as each age group feels the effect of inflation differently. Our Generational Inflation Barometer shows millennials actually face an inflation rate of 0.8%, double that of older generations.

For the last two years it has been young people who have borne the brunt of the rising cost of living. The upward pressure comes largely from their spending on eating out, rent and bills. At the same time, they spend less on grocery shopping and eating in and therefore don’t benefit from the year-on-year drag on inflation which comes from cheaper food prices and non-alcoholic beverages.”