Inflation watchers were greeted by a rise this month, with the latest official figures showing a rise to 2.5% for the year to July.
Price inflation, as measured by the Consumer Prices Index (CPI) rose from 2.4% the previous month, due in part to higher prices for transport costs and computer games.
There were some falls in the price of clothing which partly offset these price rises.
It’s the first rise in CPI price inflation since last November, in line with medium term economic forecasts and remaining higher than the Bank of England’s target of 2%.
Last November, the CPI measure of price inflation reached a five-year high of 3.1%, due largely to the inflationary impact of falling Pound Sterling on import costs.
The Bank of England expected CPI price inflation to reach 2.6% for the year to July, before falling back. This forecast suggests that price inflation has reached a peak and could now start moving towards the target level.
This could however take a couple of years to materialise and will depend to some extent on the pace and scale of interest rate hikes during that time.
Another measure of price inflation, the Retail Prices Index (RPI), fell in the twelve months to July, to 3.2%. This is significant because the Department for Transport uses the RPI inflation measure to set the maximum annual increase for regulated rail fares.
Price inflation is important from a financial planning perspective because it has a big impact on the cost of living, especially when inflation exceeds income increases over time.
It only takes a modest gap between price inflation and earnings inflation to result in being poorer in real terms over time. Pensioners with a fixed income are especially vulnerable to rising price inflation.
The Office for National Statistics have also reported on average earnings which, excluding bonuses, rose by 2.7% in the quarter to June. This means that wage growth continues to exceed price inflation for now, so people should on average be feeling wealthier.
Kate Smith, head of pensions at Aegon, commented:
“Today’s figure of 2.5% confirms an unwelcome return of rising inflation, marking the 18th month in row that inflation has exceeded the Government’s target of 2%, and diminishing the overall spending power of households.
“There’s little comfort to be had for savers, who may have expected a welcome boost in their savings rate following the recent hike in the Bank of England base rate. However, with many banks and building societies failing to pass on the rate rise in full, many will be earning a lower rate of return than inflation, effectively losing money.
“Now is the time for those people to think long term and make their money work harder. Doing this boosts people’s savings, protects them against the ravages of inflation and helps savings last longer.”
What impact will this latest rise in price inflation have for your long-term financial planning? What inflation rate are you factoring into your plans for the future?