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Is inflation past its peak?

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Inflation came in lower than market expectations, with some economists suggesting that the worst may be over.

The Consumer Prices Index (CPI) remained at a five and a half year high of 3% in October, but this was below market expectations of 3.1%.

Food continued to be the main driver of inflation, with the prices of food and non-alcoholic drinks rising at an annual rate of 4.1%, the highest since September 2013. The weakness of sterling continued to play an important role.

The Bank of England predicted that inflation would peak at 3.2% this autumn before dropping back as the currency effect moved out of the figures.

Does this mean the worst is over? Darius McDermott, managing director, Chelsea Financial Services, said there are still pressures: “It’s been a bit more stubborn than we expected. The oil price has risen from $40 at the start of the year to over $60 today and this will start to hit in year-on-year figures. Short-term that is a worry. Will the Bank of England over-react and raise rates into a weaker economy?”

Tom Selby, senior analyst at AJ Bell, said: “The governor of the Bank of England, Mark Carney, previously said he expects inflation to peak around October and it’s not just the UK consumer that will be hoping he is correct.

“Philip Hammond will be acutely aware that the UK economy remains precariously balanced as he prepares for his first Budget since the election. UK retailers are also likely to feel the pressure if consumers are forced to rein in their spending in the crucial Christmas trading period.

“However, we are by no means at crisis point. The deflationary forces of consumer debt and the internet are still at work and are likely to prevent inflation running out of control. By historical standards 3% is relatively modest and the Bank of England still has plenty of scope to use interest rate increases to bring it back down towards its 2% target.”

Ed Smith, head of asset allocation research at Rathbones said peak inflation is close: “Indeed, our analysis suggests domestically generated inflation may have peaked as early as the first quarter of this year. And if it weren’t for British Gas pushing up their prices and the recent increase in the sterling price of oil, headline consumer price inflation could have peaked earlier than November too.

“There may be concern about this especially with wage growth lagging, but investors and consumers need not worry too much. We believe that inflation will remain well anchored longer term. We also believe the Bank will be more concerned about supporting growth than what we see as a ‘high’ inflation blip, and today’s number will not alter the very shallow path of interest rates set out by the Bank at their last policy meeting.”

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