The latest inflation data from the Office for National Statistics shows both the Consumer Prices Index and the Retail Prices Index in an unwelcome move upwards.
Although the rise was not totally unexpected, the size of the move was. CPI rose from 2.2% in September to 2.7% in October and the RPI moved up from 2.6% in September to 3.2% in October.
A year ago the Governor of the Bank of England, Mervyn King, had said that inflation was expected to fall back to within the 2% target range by the end of this year. But more recently the BoE has had to admit that inflation is being a little more ‘sticky’ than had been hoped. Some analysts say that inflation could reach about 3.5% by the middle of next year, which could explain the MPC’s reluctance to indulge in more QE.
The main driver behind the rise in both RPI and CPI is the huge increase in university tuition fees that is now feeding through, but this does not affect everyone in the country. The second main upward pressure came from food & non-alcoholic beverages (especially potatoes, fruit and confectionery), which is what people see every day when they go for their day-to-day shopping.
KPMG Economist, Tom Hooper, hoped that this was transitory saying “Hopefully October's sharp uptick in inflation proves to be just a blip being that it is driven at least in part by the increase in university tuition fees. But if it marks the beginning of a reversal in the recent downward trend it threatens to put a spanner in the works. After all, recent falls in CPI have raised hopes that the household sector will soon receive a boost as real wages start to grow again – for now at least those hopes have been put on hold.
“We will find out the path the Bank of England expects prices and growth to take tomorrow when it publishes its Quarterly Inflation Report. But the economy is already showing signs that it has failed to carry momentum from the summer into the fourth quarter. And the big picture is that output continues to do no more than bounce along the bottom as it has for the past couple of years. Continuing domestic headwinds, the threat of an escalation in the Eurozone crisis and only slow progress in rebalancing the economy mean the recovery is set to remain fragile. With this in mind and despite this month's inflation hiccup further monetary stimulus should be expected in the New Year.”
For Andrew Goodwin, senior economic advisor to the Ernst & Young ITEM Club, the size of the rise was unexpected and commented “This is a very nasty surprise. We had expected inflation to pick up in October because of the rise in tuition fees and food prices, but the scale of the increase was surprisingly large.
“Unfortunately we cannot write this off as a one-off as the tuition fees effect will now be in the index until next year. And with the impact of the recent increases in domestic energy bills set to hit the index next month, it looks as if inflation is going to remain in the 2.5-3% range for the remainder of the year.
“But further out we are still confident that inflation will slow back towards the target. And because of the causes of the October increase, it could be argued that these figures aren’t quite as bad for household finances as they may first appear. They represent a significant squeeze for those affected directly by the tuition fee increase, however the vast majority of people will not have been impacted.
"However, even allowing for this, it is clear that the influence of higher food and energy prices will be felt by consumers. The easing of inflationary pressures throughout the summer had translated into a stronger consumer performance, but there is a danger that this will stutter as we move into winter, adding another reason to be concerned about the Q4 growth figures.”