LONDON – Inflation in September jumped to its highest level in five years, as Brexit continues to push up the cost of living in the UK.
The UK’s Consumer Prices Index (CPI) inflation rate – the key measure of inflation – was 3% in September, up from 2.9% in the previous month, according to the Office for National Statistics.
September’s figure marks the first time since April 2012 that prices have increased by 3% or more.
CPI measures the weighted average of prices of a basket of goods and services, such as food, transportation, and medical care.
CPIH, a measure which includes costs associated with maintaining a home – and which the ONS cites as a more useful indicator of living costs than CPI – was 2.8% in the month, up from 2.7% in August.
“Food prices and a range of transport costs helped to push up inflation in September. These effects were partly offset by clothing prices that rose less strongly than this time last year,” Mike Prestwood, the ONS’ head of inflation.
“While oil and fuel costs continued to rise, overall, the rates of inflation for raw materials and goods leaving factories were little changed in September.”
The chart below illustrates the sharp rise in inflation following last year’s Brexit vote. OOH represents owner occupiers’ housing costs, which measures the cost of owning, maintaining, and living in one’s own home:
“The pound in your pocket is depreciating, as the rising price of goods continues to chip away at its value. Consumer spending remains remarkably resilient in the face of inflationary pressures and weak wage growth, but the current squeeze on household budgets is a slow burner, as it takes some time for economic reality to hit home,” Laith Khalaf, a senior analyst at Hargreaves Lansdown said in an emailed statement.
The sharp fall in the value of the pound following the UK’s vote to leave the EU last year has raised the cost of imports and pushed up the rate of inflation. Most major forecasters believe that inflation’s peak is likely to be somewhere around the 3% mark it reached in September.
Inflation’s impact on the British economy is being exacerbated by the fact that real wages are actually growing more slowly than prices are rising, meaning that the average Brit is actually seeing the amount of money they have to spend decrease.
The ONS’ latest wage growth numbers will be released on Wednesday, helping to create a fuller picture of just how intense the squeeze on Britain’s consumers is right now.
Tuesday’s inflation number is likely to make an interest rate hike from the Bank of England in November virtually certain. The bank’s policymakers have repeatedly said that a hike in interest rates from 0.25% to 0.5% could come in the near future.
At its simplest level, the policy dilemma facing Britain’s central bank when it comes to rates, is that it must balance surging inflation with the slowdown in the economy, dwindling consumer spending and declining inward investment. With inflation hitting 3% last month, it seems more likely than ever before that the bank will see the see-saw tilting toward the inflation side of the argument, prompting a rate hike.