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Inflation levels out at 3% for January

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Written by: Paloma Kubiak
13/02/2018
The UK rate of inflation remained at 3% in January, official statistics reveal. However, the inflation rate has now been above the Bank of England’s 2% target for nearly a year.

The Consumer Price Index (CPI) has eased from the November peak of 3.1%. For the second month in a row it has come in at 3%. However, this figure is 1% above the Bank of England’s inflation target of 2%, and it’s still 10 times higher than it was just two years ago.

According to the Office for National Statistics (ONS), a fall in fuel prices and transport costs contributed to the downward trend. But this was partially offset by an increase in recreational and cultural goods and services, such as visits to zoos and gardens. Food and drink, as well as clothing and footwear prices had also increased over the course of the year.

UK consumer price inflation including owner occupiers’ housing costs (CPIH) came in at 2.7% in January – again unchanged from December’s rate, and a slight fall from the 2.8% recorded in the previous month.

Inflation ‘wreaks havoc with household budgets and retirement plans’

Even though inflation dipped, the 3% rate means UK households need to find an extra £23.5bn a year (£864 per household) to maintain their standard of living compared to 12 months ago, according to Retirement Advantage.

Andrew Tully, pensions technical director at Retirement Advantage, said: “Inflation is the hidden force that can wreak havoc with household budgets and retirement plans. The latest numbers will leave people reeling and will hit living standards – we will all need to find that little bit extra to make ends meet.

“With wage growth stagnant, and inflation predicted to remain close to recent rates in the short-term, the squeeze on living standards will continue.”

He added that for people living off a fixed income in retirement, inflation of 3% will halve spending power in just 20 years.

But Maike Currie, investment director for personal investing at Fidelity International, said a little bit of inflation can be good.

She said: “Inflation can be both your friend and your foe. A little bit of the right type of inflation can be a good thing. It’s a sign of an improving economy and for borrowers it means their debts will reduce over time in real terms. Those who bought a house in the 1970s will know first-hand how the value of their mortgage debt decreased in real terms as their wages increased. Governments also welcome some inflation as they see the value of their borrowing reduce too.

“However, it’s a different story for savers, or those reliant on a fixed income like retirees. Despite speculation about a looming rate rise, if inflation remains in check, there’s no incentive for the Bank of England to put up rates too soon.  This means the stock market will be one of the few places offering an inflation-beating return.”

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