Price inflation is in the news again today, with the Consumer Prices Index (CPI) measure of inflation rising to 3.1% in November.
This is up from 3% in October and represents the highest level of CPI inflation since March 2012.
According to the Office for National Statistics, the largest upward contribution to the inflation change came from air fares. Prices for air fares fell between October and November but by less than a year ago.
They also reported rising prices for a range of recreational and cultural goods and services, most notably computer games, which also had an upward effect on average price inflation.
Not all prices rose compared to a year earlier, with falling prices in the miscellaneous goods and services category (this covers products such as travel goods and financial services). This category provided the largest offsetting downward contribution.
With a Bank of England Monetary Policy Committee meeting taking place this week (the MPC was granted ‘exceptional pre-release access’ to an estimate of CPI inflation first thing on Monday morning), this rising price inflation might nudge them towards another small interest rate rise. We will have to wait until Thursday lunchtime to see how these latest inflation figures factor into their thinking.
Because CPI price inflation has now exceeded 3% and is more than 1% higher than the official Bank of England target of 2%, the Bank of England governor Mark Carney will need to send an official explanation letter to Chancellor Philip Hammond. This letter will outline the Bank’s approach to bringing price inflation back down towards the target.
Commenting on the letter, Azad Zangana, Schroders’ Senior European Economist said:
The letter will undoubtedly mention the depreciation in sterling since the Brexit referendum, but also higher energy prices recently. The Bank raised interest rates in November, and has hinted that it will do again two more times over the next three years.
The Bank of England has previously said it expected price inflation to peak in October or November this year, so this latest rise in price inflation might represent the highest we see during the current economic cycle.
It does however represent bad news for savers who are continuing to see their cash eroded in real terms by the combination of low interest rates and high price inflation.
Savers have a number of options with this real term erosion taking place.
They can accept the real term capital erosion as a price to pay for capital security. With rising interest rates, it is likely that in the medium term this erosion will slow down, stop and potentially be reversed.
Investing capital is an option for savers who have sufficient financial capacity for the risks involved and need to preserve the buying power of their capital over the longer term.
This isn’t an ‘all or nothing’ decision to make; within the context of a comprehensive financial plan, appropriate balances can be allocated to cash savings and investments, in order to satisfy long-term financial goals.
