UK Inflation rate registers surprise drop

Posted by Neil Greenhill in Personal Finance on 18 November 2016 - Neil is a Senior Credit Analyst at checkmyfile

The Consumer Price Index measure of inflation has dropped from 1% in September to 0.9% in October, according to official government figures compiled by the Office for National Statistics (ONS). This figure came as a surprise to markets as all the signs were that inflationary pressures were starting to build, with many predicting the rate would rise to 1.1%.

Cut price clothes and reduced increases in university fees were singled out as the biggest causes of the drop. However, a drop in the cost of toys, hotel stays and non-alcoholic drinks also helped push the inflation rate lower.

Although many expect the decrease in the value of the pound to push up inflation, the ONS found no evidence that this has yet occurred, but it may be that retailers are putting off passing increased costs onto the consumer. The ONS found that the price of raw materials and oil increased 4.1% in October and the price of goods leaving factories rose 2.1%. Mike Prestwood from the ONS comments, "After initially pushing up the prices of raw materials, the recent fall in the value of the pound is now starting to boost the price of goods leaving factories as well.”

The expectation amongst economists is that inflation will pick up in the coming months, as these inflationary pressures are passed onto consumers and that the surprise dip in inflation for October will prove to be temporary suspension of the upward trend in prices. The Bank of England expects inflation to have hit 2.7% within a year.

Increasing inflation could lead to interest rate rises to be brought forward, however the Bank of England has suggested that a small overshoot of their 2% inflation target could be tolerated and rates left low to support the economy and employment levels. Rising prices will also squeeze family finances, as wages are predicted to grow more slowly than inflation during 2017.

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