Should we be concerned about the rise in inflation?

Should we be concerned about the rise in inflation?

The recent jump in UK inflation to 2.3% in February has taken many commentators by surprise. Everybody knew it was going up but they didn’t expect it to be quite so high. In fact, this is now the highest level of inflation since September 2013 so should we be concerned?

Well, it’s probably too early to say but there are definitely some things that we need to be alive to. There is no doubt that Brexit and the fall in sterling has been the main reason why core inflation has risen. By core inflation we mean the headline rate minus things such as energy, food, alcoholic beverages and tobacco which have all gone up in price. Rising transport prices, particularly for fuel, are also behind the hike in inflation.

So, on the face of it, it does look like that the UK has a more serious underlying inflation problem than the US and the Euro area at the moment. Does this mean we can expect to see interest rates go up?

Not necessarily. Inflation was higher earlier this decade and the rates didn’t shift so there’s no reason to expect that the Bank of England will have a knee-jerk reaction just yet. Commentators are more concerned about the rate that wages are going up compared to inflation. As a general rule, when inflation is higher than wage rises, people start to tighten their belts, consumer demand drops and house prices are affected.

Data on average wages will be released next month so we will be able to gauge the situation more accurately then. Despite this, the ongoing supply and demand issues in the UK, could still probably mean that house prices will be less affected than many people think and, of course, the low value of sterling means that our exporters are having a field day when it comes to shifting their products overseas. In fact, it may be our exporters that we need to rely on for supporting the growth of the UK economy over the next 12 to 18 months.