Anna Stupnytska (pictured), Global Economist at Fidelity International comments on the latest UK inflation figures…
UK headline CPI inflation was 0.6 per cent year-on-year in July, up from 0.50 per per cent in June. 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 per cent in trade-weighted term since the end of 2015, could boost inflation by more than 1 per cent, 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 per cent 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 per cent month-on-month contraction in GDP for July (around 2 per cent 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.