Christmas Pinch: Inflation Nears Six-year High To Reach 3.1% In November

Figures from the ONS released this morning said the 12-month UK Consumer Prices Index (CPI) reached 3.1% in November, the highest level in five years and the first time it has risen above 3% since March 2012.

The move could lead to Bank of England governor penning a letter to Chancellor Philip Hammond to explain why it is more than 1% away from the 2% target.

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The ONS said the largest upward contribution to change in  the  CPI rate came from air fares, which fell between October and November but by less than a year ago.

Rising prices for a range of recreational and cultural goods and services, most notably computer games, also had an upward effect.

However, falling prices in the miscellaneous goods and services category, which includes financial services,  provided the largest offsetting downward contribution.

The Consumer Prices Index including owner occupiers' housing costs (CPIH) 12-month rate was 2.8% in November 2017, unchanged from October 2017.

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Aberdeen Standard Investments chief economist Lucy O'Carroll commented: "This is slightly higher than expected and will prompt a letter from Bank of England governor Carney to the Chancellor, explaining why inflation has overshot its target by this margin and what the Bank will do about it.

"It is quite possible that inflation is now close to its peak. But some of the latest surveys suggest that service sector costs and prices are rising. Given how dominant services are in the economy, this could feed through to inflation overall.

"That means that further interest rate rises are definitely not off the table. The Bank of England has a tricky tightrope to walk. Too much inflation could threaten the Bank's credibility and therefore its grip on the economy. But they need to keep consumer spending, the engine of the UK economy, chugging along too. If inflation keeps creeping up, or remains elevated, then the chances of the engine sputtering rise incrementally."

Ben Lord, manager of the M&G UK Inflation Linked Corporate Bond fund, comments on inflation in the run up to Christmas:

"UK inflation picked up sharply in 2017 as the impact of last year's fall in sterling finally started to feed through to consumer prices. With wages failing to keep pace with the cost of living, consumers could face another squeeze in the run up to Christmas. Indeed, a survey by Good Housekeeping magazine, found that the cheapest supermarket Christmas dinner will be 18% more expensive compared to last year - some way ahead of the rise in the CPI.

"Providing we do not see a renewed fall in sterling, or an unexpected spike in global commodity prices, we think UK inflation may well have peaked for the time being. However, we should not be complacent either as inflation has a habit of creeping up on us when we least expect it."

Ben Brettell, senior economist at Hargreaves Lansdown, said Carney's letter to the Chancellor will be an easy letter to write: "When Mark Carney pens his letter to the Chancellor he will have a ready answer as to why inflation is so high - we are still seeing the effect of the weaker pound filtering through to prices. Given Carney and colleagues raised interest rates last month, he will also be able to point to the fact that, for once, he is doing something about it too.

"Sterling gained around a third of a cent against the dollar, as traders bet on the next upward move in interest rate coming slightly sooner. In comments last month the Bank signalled it expects to lift borrowing costs twice in the next three years, but is not expected to raise rates when it meets this week.

"The news brings the UK's cost of living squeeze into focus once more. But labour market figures due tomorrow are expected to show a jump in pay growth to 2.5%. Inflation should fall back next year as the currency effect eventually works its way through the figures, though today's numbers showed factories are still under pressure from higher global oil prices. But with wage growth picking up we should see an end to falling real pay in due course.

"That will be of small comfort, however, to households facing a significant increase in the cost of Christmas this year. Some of the biggest contributors to the inflation rate were food and recreational goods such as computer games."