Inflation rises to 1.8% in April though experts say it should remain below 2% for now

20th May 2014

Inflation has risen to 1.8% in the year to April from 1.6% the previous month as measured by the Consumer Price Index according to the Office for National Statistics. The figure is slightly higher than last week’s wage growth index which rose at a rate of 1.7%.

The ONS says increases in transport costs, notably air fares, sea fares and motor fuels, provided the largest contribution to the rise in the rate. It says an overall fall in the price of food was the largest offsetting factor. The timing of Easter is likely to have had an impact on the index – most notably for air fares and sea fares.

Expert views

Ben Brettell, economics editor, Hargreaves Lansdown says: “It’s important to look at the overall trend rather than one month’s number in isolation. The increase in inflation is largely down to a period this year where petrol prices have been flat, compared with the same month last year when they fell.

“Inflation at 1.8% is higher than last week’s wage growth figure of 1.7%, but I’m not sure this adds much to the so-called “cost of living crisis” debate. It is clear that there is a trend for price inflation to be subdued. The Bank of England, along with most economists, expect it to remain below the 2% target for a number of months. Wage inflation is harder to forecast, but it looks like we could see a period of modest real wage growth with wages increasing marginally faster than prices over the next year or so.

Tony Wilson, head of strategy at the foreign exchange specialists FEXCO, says: “A surprisingly large jump in inflation has given back some momentum to a Pound that has been under pressure since the Bank of England’s non-committal Inflation Report last week.

“Sterling immediately spiked against the Dollar and rose to a 16-month high against the Euro. But with inflation once again climbing above average wage increases, the rally was short-lived. The UK’s CPI remains comfortably below the Bank of England’s 2% target, meaning the interest rate implications of the jump in inflation are muted.

“While the consensus among economists is for an interest rate rise in early 2015, hints at the weekend by Governor Mark Carney that the Bank could soon introduce other measures to dampen a housing bubble leave unanswered the big question of when, not if, the rate rise will come.”

Orla Garvey, Sovereign fund manager at Aviva Investors says: “The uptick in inflation was due primarily to a temporary jump in airfares which rose due to the timing of Easter holidays. Some of this increase was offset by a significant drop in food price inflation. There is potential for a backup in CPI next month as airfares fall back again. The extent to which food prices rebound will thus be an important factor going forward.

“Today’s print is broadly in line with current BoE forecasts. While investors are focused on the European Central Bank’s attempts to boost the euro zone’s flagging economy, inflation expectations will likely remain low.”

TUC General Secretary Frances O’Grady says: “Last month we were told the living standards crisis was over. Yet one month later real wages are falling again. Even on a measure that excludes the cost of housing, prices are rising faster than wage packets.

“It will be years before workers even recover the earnings they have lost since 2008, let alone start to feel any better off. A real recovery where decent jobs provide fair wages, security and future prospects remains a distant goal.”

Chris Williams, CEO of www.wealthhorizon.com says:“Inflation may remain at a historically low levels, but it still remains higher than the rate that most savers are getting on their miserly savings accounts at present. Simply put, placing money into a savings deposit account for the long term simply does not make sense at the moment and yet so many people are still putting their faith in them.

“The long-term goals of savers are being marginalized by the fact that as they save, the real value of their cash pots are actually in decline.   A better option for many may be to move their savings into an investment based product which could offer better long term returns”.

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