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Squeeze on cost of living tightens as inflation hits 2.9%

More expensive imports has led to a higher than expected inflation rise to 2.9% in August. The figures further suggest the weak pound has done more harm than good.


UK inflation hit 2.9% in August adding further pressure on the cost of living for Brits. The latest figures from the Office for National Statistics (ONS) show the Consumer Price Index (CPI) 12-month rate rose from 2.6% in July to 2.9% in August. Since the referendum vote last year and aside from a brief dip over June and July, the 12-month inflation rate has steadily risen from 0.5% to the 2.9% we’re seeing now. Inflation hit 2.9% in May before slowing to 2.6% in June and July.

The ONS said rising prices for clothing and fuel were the main contributors with clothing and footwear inflation reaching a record 4.6%. It added “the rise in inflation in this category may reflect changes in the exchange rate impacting on the most import-intensive categories in the index that includes owner occupiers’ housing costs (CPIH).

The charts below reflect the 12-month rates for CPI, OOH (owner occupiers’ housing costs) and the Consumer Price Index including owner occupiers’ housing costs (CIPH) for the last 10 years. You can see the full report at ons.gov.uk.

The news follows last week’s report showing the UK trade deficit widened again leading British Chambers of Commerce economist Suren Thiru to say the weakened pound since the Brexit vote has “done more harm than good”.

Fall in pound doing more harm than good as UK trade deficit widens

Commenting on today’s inflation figures Howard Archer, chief economic advisor to the EY Item Club, said the rise back up to 2.9% “very much keeps the squeeze on consumers as it highly likely marked another month of negative real income growth”. He added “inflation will likely hover around 3% over the rest of 2017 and earnings growth looks unlikely to pick up significantly in the near term at least”.

Consumers still look unlikely to see any significant easing in their squeeze before 2018. Inflation will likely hover around 3% over the rest of 2017 and earnings growth looks unlikely to pick up significantly in the near term at least.

This does not bode well for consumer spending over the rest of 2017.

Howard Archer, chief economic advisor to the EY Item Club

TUC general secretary Frances O’Grady called on the government “to get a grip and get pay rising across the economy” before adding “a good start would be to scrap the pay cap for all public sector workers”.

In a tweet, Lib Dem leader Vince Cable said the rise inflation meant public sector workers face a 2% cut in the coming year.

We’ll find out just how big the squeeze is on Britons’ cost of living when the ONS publishes the latest wage growth figures tomorrow.

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