Inflation warning: Cost of living to rise as wage growth drops – Britons urged to act

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Inflation figures released today showed CPI fell from 3.2 to 3.1 percent but in recent months, the Bank of England (BoE) warned it could rise to over four percent by the end of the year. Recent data from the ONS also showed pay growth, including bonuses, dropped from over eight percent to 7.2 percent, highlighting the gap between income and the cost of living is narrowing.

While 3.1 percent is still above the BoE’s two percent target, some welcomed the decrease. Annabelle Williams, a personal finance expert at Nutmeg, noted the decrease could be a sign of better times ahead.

“Inflation has fallen slightly – welcome news for households feeling the burn from higher energy costs and the fuel shortage,” she said.

“This is a sign that inflation could potentially ease in the coming months, but there are still pressures that are keeping inflation high and could push it up further still. The cost of transport and housing remains high whilst restaurants, hospitality and retail are among the industries which have struggled amid the shortage of HGV drivers and petrol, rising energy costs and big jumps in the prices of some raw ingredients – all of which has left these industries with shortages and supply chain issues.

“Britons have done a fantastic job of saving and investing their disposable income over the past 18 months. The pandemic has fundamentally altered how we look at money, and many people are taking their personal finances seriously. Those who can afford to should keep up the habit of topping up their savings and investments.”

However, others warned continued inflation worries may force the BoE and other central banks to dramatically alter interest rates. Additionally, quantitative easing plans may also be upended, which in turn could have a dramatic impact on a range of assets.

Daniele Antonucci, the chief economist & macro strategist at Quintet Private Bank, commented: “Even though the inflation figures are more or less in line with expectations, they’ll likely contribute to the narrative of possibly higher interest rates in the UK.

“Compared to the Fed, the BoE is more concerned by rising inflation, given greater reliance on energy imports, currency weakness raising imported inflation and faster wage growth – possibly driven by Brexit-related structural adjustment to the workforce.

“When it comes to incremental asset purchases, QE is coming to an end in the UK. The next step is rate hikes. While timing is highly uncertain, we now see the BoE to start hiking sooner rather than later, possibly even late this year.

“We would expect any rate adjustment to be gradual, though, rather than a fast and hard hiking cycle, given downside risks such as the end of the furlough scheme and the ongoing spike in energy prices.”

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In recent months, policymakers at the BoE have hinted that interest rate hikes could be on the horizon. Last month, the Monetary Policy Committee (MPC) were questioned by the Treasury Committee on the state of the economy.

Felicity Buchan, the Conservative MP for Kensington, brought up interest rates during this meeting. Ms Buchan said: “In our discussion on forward guidance and whether the threshold [for raising rates] had been met, you kindly gave us the information it was four to four…

“…Do you mind telling us where you stand [today]?”

In response, Andrew Bailey, the Governor of the BoE, said: “I think we can do that. So my view was that the guidance had been met.”

Additionally, Dave Ramsden, the Deputy Governor for Markets and Banking at the BoE, responded: “I gave a speech in July where I sort of flagged that I thought the guidance was close to being met.

“And by the time we got to the August round, my view also was that the guidance, which [as you know] was significant progress on eliminating spare capacity and sustainable return of inflation to target, had been met.

“But those were always necessary rather than sufficient conditions for tightening.”

More recently in mid-October, Michael Saunders, an external member of the MPC, noted the markets could be correct in factoring in raised rates.

“I’m not in favour of using code words or stating our intentions in advance of the meeting too precisely, the decisions get taken at the proper time,” he said.

“But markets have priced in over the last few months an earlier rise in Bank rate than previously and I think that’s appropriate.

“The February one is fully priced in and for December, it’s half priced in. I’m not trying to give a commentary on exactly which one, but I think it is appropriate that the markets have moved to pricing a significantly earlier path of tightening than they did previously.”

Currently, the BoE has the base rate set at 0.1 percent.

The next review of the rate will take place on November 4, 2021.

The base rate limits what retail banks can offer to consumers and unfortunately, according to analysis from Moneyfacts.co.uk, there is not one standard savings account that can outpace inflation at the moment.

The current reprieve from higher inflation may also be short lived as officially, the predicted rate for inflation during Q3 2022 is 3.3 percent.

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