The Consumer Prices Index (CPI) rose by 0.6 per cent in the year to July 2016, prompting predictions the headline rate could increase to 3 per cent and that defined benefit pensions will increase.
The main contributors to the increase in the rate were rising prices for motor fuel, alcoholic beverages and accommodation services, and a smaller fall in food prices than a year ago. Experts say the impact of rising import costs caused by the post-Brexit weakening of sterling will work its way through the system within 12 months.
The ONS says that although the increase takes it to the highest level seen since November 2014, it is still relatively low in the historic context. The increase compares to the 0.5 per cent rise in the year to June.
The Retail Price Index stood at 1.9 per cent for the period.
JLT Employee Benefits director Charles Cowling says: “Latest inflation figures confirm a Brexit double whammy for pension schemes, the first post Brexit evidence of the impact of falling sterling on UK prices.
“The July rise in inflation heaps further woes on pension schemes that had already seen their deficits soar post Brexit as a result of the latest round of QE and falls in interest rates. With pension benefits being linked to inflation, deficits will likely worsen further, adding pressure on trustees and companies alike.
“Whether or not Brexit is good for the UK economy, it has certainly been calamitous so far for pension schemes which were already suffering massively in markets which have been extremely difficult. This latest news must increase the likelihood of the Brexit effect bringing down some companies and their pension schemes.”
Hargreaves Lansdown senior economist Ben Brettell says: “July’s CPI report marks the first piece of hard economic data since the referendum result, and as such will be keenly scrutinised for any clues as to the impact of the Brexit vote.
“Perhaps in a taste of things to come, import prices rose 6.5 per cent year-on-year, their fastest rate in five years.
“However, in truth the small tick upwards in the headline rate to 0.6 per cent tells us little. The ONS collects data in the middle of each month, so the prices were collected just two or three weeks after the vote. It’s almost certain that the weaker pound will cause inflation to rise more sharply in the coming months, but the effect of sterling’s depreciation will take time to feed through fully into the figures as businesses gradually adjust to the new environment. Over the next few months existing inventories will be wound down and currency hedges put in place by supermarkets and other importers will gradually start to fall out of the equation. It is only then that the full impact will be seen.
“July’s figure was also held back by energy and fuel prices. Though prices rose month-on-month, Brent crude was still slightly cheaper in sterling terms this last month than a year earlier, despite the fall in the pound.
“Forecasts suggest CPI inflation could ultimately reach 3 per cent. However, this will be a temporary factor, assuming sterling remains weak, the effect will fall out of the year-on-year calculation in the second half of next year.
“Underlying inflationary pressure is hard to see, with Brexit-related economic uncertainty likely to dampen both consumer spending and wage growth in the short term. The Bank of England is rightly ignoring what should be a temporary spike in inflation when it sets monetary policy. The Bank is widely expected to leave rates on hold at its next meeting in September, though swap markets are pricing in around a 33 per cent chance of a cut to zero by the end of the year.”
AJ Bell investment director Russ Mould says: “At 0.6 per cent UK inflation remains miles below the Bank of England’s 2.0 per cent target. As such, the Bank of England is likely to push ahead with the three-part monetary stimulus programme, with the prospect of further interest rate cuts a possibility. However, seven years of record-low rates and quantitative easing suggest the policy has been a failure so far, questioning whether “more of the same” is a suitable response now.
“This is the first full month’s figures following sterling’s decline in the wake of the EU referendum result on 24 June and the slight increase in inflation may give some hint of what a weak pound could mean going forward.”
