Putting inflation in context – what does 2.9% mean for us?


The Consumer Prices Index (CPI) reached 2.9% in May 2017. This brings inflation back to levels last seen in 2012.

Goods and services have become more expensive in the UK following the BREXIT vote and the start of exit talks.

The pound has weakened and prices have risen.

The ONS points to a rise of 7.7% in electricity prices during the year. Food and alcohol, clothing and footwear, furniture and household goods and recreation and culture are all showing their highest rate of increase for 12 months.

What can inflation tell us about what is ahead for the economy?

Not very much it turns out. Inflation is a lagging indicator of economic activity, and it is only after a trend is underway that it starts to move significantly.

Where it does have value is in telling us where there might be potential hotspots.

For example, imported goods are clearly going to be more expensive because of the weak pound – and the four categories with the highest inflation rate are all dependent on imports or global prices.

That tells us to watch the exchange rate carefully if our business depends on global markets.

Inflation is expected to continue rising for the rest of the year, peaking at over 3%.

As the increase appears to be mostly due to exchange rates it is unlikely that interest rates will be increased in the short term.

What it also means is that households will have less money after they have paid for more expensive goods and services, and this is already showing up in lower levels of household saving.

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