While far from being a watershed moment, today’s announcement that the rate of inflation has reached the 3% point does pile more pressure on already squeezed living standards.
For people up and down the county, the pound in their pocket now feels a little less valuable. Inflation is now confidently outstripping wage rises, which have tended to be around 1-2%, meaning that people’s disposable income is in decline and many will have to take on more debt or save less in order to maintain their living standards.
Our view is that current levels of inflation are nothing to worry about – it’s simply a case of businesses passing on higher import costs, brought about by a fall in sterling, to their customers.
Over the coming months, our expectation is that it will start to fall back to 2%, the level at which the Bank of England is mandated to maintain it. This view is not necessarily shared by the Bank of England, and today’s announcement makes an interest rate rise in November a near certainty as the Monetary Policy Committee takes action show they are keeping inflation under control.
Matthew Brittain is investment analyst at Sanlam UK.