Inflation at 2.3% – time for cash savers to take more risk
21 March 2017
Russ Mould, investment director at AJ Bell looks at the impact of CPI hitting 2.3%.
Inflation exceeded the Bank of England’s 2% target for the first time since November 2013 with both CPI and the new CPIH measures hitting 2.3% in February. CPIH, which includes owner occupier housing costs, is now at its highest level since September 2013 and is at exactly the same level as wage growth meaning inflation will start to wipe out any advance people are seeing in their wages.
Transport prices made the largest contribution to the increase as the price of oil increased fuel prices, although food prices had an upward effect on inflation for the first time since April 2014, demonstrating the impact the weak pound is having on the cost of imported goods.
The question now is whether this data will prompt a move from the Bank of England on interest rates. The 8-1 vote last week not to raise rates show that it is clearly of view this is a transitory spike caused by the weak pound and the increase in the oil price. However, if oil stays where it is at $51 then oil will be flat year on year by Q4 and the effect will start to drop out of the transport element of inflation which was the largest contributor to the increase in February.
The Bank of England and OBR see inflation peaking around 2.8% and it will be wary of making an increase while wages are falling and inflation is increasing, so we are unlikely to see any knee jerk reactions from Mark Carney and his team.
For savers, rising inflation should act as a spur to anyone who has large amounts of savings held in low or zero interest paying bank accounts. For these people, inflation will eat into the value of their money and anyone in this position should consider whether taking some investment risk could help at least preserve the spending power of their savings.
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