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Consultants comment on UK inflation

Aug 20
Tags: PwC
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The UK economy is currently in a difficult situation, with Brexit on the horizon and a lack of certainty about what exactly that entails. With various political figures determined either to take Britain out of the EU without a deal or prevent that situation from happening, it’s no surprise that prices are rising and the value of the pound is falling in preparation for the worst.

Throughout all of this, the Bank of England’s aim has been to keep inflation down and maintain interest rates as much as possible. However, the latest data from the Office for National Statistics (ONS) suggests these goals have not quite been met.

The value of the Consumer Price Index (CPI) rose slightly in July, from 2.0 per cent up to 2.1 per cent. This is still roughly in keeping with the Bank of England’s goal of maintaining consumer price inflation as close to 2.0 per cent as possible.

This rise seems to have been caused by an increase in the value of clothing and footwear, as the lower price of these items had for several months been decreasing the overall value of the CPI. It remains to be seen whether this is the beginning of a continued rise that will increase the value of the CPI beyond 2.1 per cent.

However, PwC’s senior economist Mike Jakeman believes this will not be the case. He predicts the UK economy will continue to falter, which in turn will decrease demand for consumer products and therefore cause inflation to fall below the Bank of England’s goal rate of 2.0 per cent.

Of course, Brexit could change all of this. Mr Jakeman added: “Were the UK to leave the EU without a deal, the Bank would then face a difficult decision between cutting rates to support growth (which would be likely to push inflation up further) or raising rates to keep inflation close to its target (but stymieing growth).”

Meanwhile, the Retail Price Index (RPI) increased by 2.8 per cent, significantly above the target set by the Bank of England. This is the rate at which retail prices are set, meaning it could have a significant impact on consumers.

Yael Selfin, Chief Economist at KPMG UK, said this put the Bank of England in a quandary, adding: “With inflation now above the Bank of England target, and the weaker pound causing upward pressure on prices to percolate in coming months, the Monetary Policy Committee is likely to feel more unease. 

“However, the expected decline in energy prices in the autumn, coupled with a weaker economy, should see inflation moderate in the final months of the year.”

Once again, the shadow of Brexit hangs over this prediction. Should the Bank of England decide to cut interest rates, it could go a long way towards supporting the economy in the event of leaving the EU without a deal.

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