With March’s inflation figures the strongest since 2014, should we be prepared for a rapid rise in the coming months?

Consumers Feel The Pinch With Christmas Around The Corner
British consumer prices rose by 0.5 per cent year-on-year in March (Source: Getty)

Andrew Sentance, senior economic adviser to PwC and a former member of the Bank of England’s Monetary Policy Committee, says Yes.

Once again, deflation has been the dog which hasn’t barked in the UK. Inflation is gradually coming back. The headline rate is 0.5 per cent, but the underlying rate – excluding volatile food and energy prices – is now 1.5 per cent, nearly 1 percentage point up on a year ago.

Three factors are likely to push inflation up further this year – firmer oil and food prices, increasing wage pressures reinforced by the National Living Wage, and a weakening currency. The pound has fallen around 14 per cent against the euro since November, losing about one seventh of its value, and sterling remains close to its lowest levels against the dollar since the mid-1980s.

We already see more price rises coming through in April – petrol and diesel, mobile phone bills, postage, car park charges and higher air passenger duty. And the current rate of house price inflation, at 7.6 per cent, is not even included in our current CPI inflation measure. So brace yourself for more price rises this year and next.

Nina Skero, senior economist at the Centre for Economic and Business Research, says No.

With oil prices stabilising and the National Living Wage now in effect, inflation is set to continue the upward trend that it has been on since October 2015. However, there is no reason to expect that this rise will be particularly rapid.

Throughout 2015, inflation stood at a record low of 0.1 per cent. Notable sources of downward pressure which contributed to this figure will continue to play a role this year. For example, supermarket price wars have seen the price of food decline for much of 2015 – a trend which was also present in the March inflation data. As such, we expect inflation to continue gradually rising, but remain below the central 2 per cent target until mid-2017.

A source of uncertainty regarding inflationary expectations is exchange rates. An appreciation in sterling would push down import prices and, in turn, inflation. A depreciation in the currency, for example due to Brexit fears, would lead to more expensive imports and higher inflation.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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