Annual inflation increased slightly in August: the CPI (Consumer Price Index) increased to 2.9%, up from 2.6% in July, and the CPIH (Consumer Price Index including Owner’s Occupier Housing Cost) increased to 2.7%, up from 2.6% a month earlier. Prices in all main categories increased in August, some, such as clothing and footwear, increasing by a record annual value of 4.6%, the highest since the series started in 2006.
Prices of food remained mainly constant on a monthly basis, with prices of meat and seasonal food declining by 0.10% and the price of alcohol, processed food and non-alcoholic beverages increasing by 0.10%. The price of transportation increased significantly by 2.85% month on month and by 10.73% year on year.
The overall increase in inflation is above the Bank of England target and higher than market expectations. Adding to this today’s gain in the value of the sterling, which stands at the highest level against the dollar since September 2016, it will be interesting to see the Bank Thursday decision on interest rates. Markets anticipate no change in interest rates at the next meeting, but the pick-up in inflation might trigger a future increase.
The change in the price of clothing and furniture does not come as a surprise to us; we have maintained many times in the past that Autumn will bring the end of hedging contracts for many non-food retailers. The large increases in prices in these categories reflect not only that the measures to protect themselves against currency depreciation might have come to an end, but that retailers have no more ability to take on cost increases so, despite very tight competition, these increases are passed on to the consumer.
We expect inflation to keep increasing slightly in the next couple of months until the effects of depreciation will be fully passed on to the consumer. With wage growth below the inflation rate and sluggish productivity gains, it is not surprising that consumer debt is at the highest level since 2008.