James Smith, Economist at ING, explains that at 2.3%, UK inflation now equals wage growth and this squeeze on household incomes is a key reason why they don't expect the Bank of England to hike rates before the end of 2018.
“The big story today is that core inflation has hit the 2% target for the first time since 2014, coming in way above expectations of a rise to 1.7% from 1.6% previously. Likewise, the headline rate pushed up to 2.3%, led by a big increase in fuel and food prices. The latter is significant because, having been driven considerably lower since 2014 by a supermarket price war, food deflation came to an end after almost three years.”
“Whilst this surge in inflation may raise a few eyebrows on the MPC, it’s what this means for consumers that really counts. At 2.3% YoY, wages (ex. bonuses) are now growing at the same rate as inflation. With rising food and fuel prices set to push inflation above 3% by the end of the year, 2017 looks set to be an increasingly tough year for households. We are already starting to see evidence of this squeeze in the spending data. Year-on-year growth in retail sales (ex. fuel) has fallen back from close to 8% in October to 2.6% in January, and consumer confidence has dipped.”
“So despite the surprisingly hawkish shift in the Bank of England’s stance last week, we suspect that concerns about surging inflation will be gradually outweighed by the slower growth backdrop. We don’t expect any change in Bank rate before the end of 2018.”