Ben Brettell, Senior Economist, Hargreaves Lansdown:
At least it’ll be an easy letter to write.
When Mark Carney pens his letter to the chancellor he’ll have a ready answer as to why inflation is so high - we’re still seeing the effect of the weaker pound filtering through to prices. Given Carney and colleagues raised interest rates last month, he’ll also be able to point to the fact that, for once, he’s 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 isn’t 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’ll 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.