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September CPI - the beginning of stagflation?

Tomorrow the ONS is due to publish the Consumer Price Index measure of inflation for September.

Consensus estimates are for a rise in CPI from 0.6% in August to 0.9% in September.

However thanks to further weakening in the pound, things have moved on significantly since the data was collected.

For most items in the all-important basket, CPI data is collected on the second or third Tuesday of the month, in this case September, apart from petrol and diesel which are calculated throughout the month.

So since the data was collected for September, the pound has fallen from approximately $1.30 to $1.21 and from €1.15 to €1.10. Meanwhile the price of oil has risen from around $46 to $51. The implication is that whatever inflation we get tomorrow, it’s probably going to go higher in the short term.

Of course CPI is still well below the 2% target of the Bank of England, though the concern is that many forecasts suggest 2017 is going to be a difficult year for the economy, so we could be in for a year of stagflation - rising inflation and a low economic growth.

If stagflation materialises in the coming months, this has negative implications for consumer spending, business margins, and the real return earned by savers. Indeed for the last year or so savers have been bailed out by low inflation, which has made the measly interest paid on cash look (sort of) palatable. However if inflation rises, that means cash savings start to go backwards in terms of their buying power. The normal policy reaction to rising inflation is a rise in interest rates, but the Bank of England is currently facing in the opposite direction, so is unlikely to ride in as a white knight to rescue cash savers.

The upward pressure on inflation from a falling currency could of course ease off if sterling recovers its poise. Or indeed if it settles at current levels, the rise in inflation will be a one off which exits stage left after twelve months, just as commodity price falls are falling out of the picture now. Indeed with wage growth still anaemic, there is little to suggest long term upward pressure on inflation, which is why the Bank of England is probably comfortable with rising CPI, for the time being at least.

Laith Khalaf, Senior Analyst, Hargreaves Lansdown:

"A weaker pound is likely to lead to higher inflation in time, but the full impact of the recent plunge in sterling won’t be evident in the CPI reading for September, and we are going to have to wait a bit longer to see precisely what the effect of sterling’s decline will be.

In the short term, we could be in for a period of stagflation, as inflation rises against a backdrop of weak economic growth.

However Inflation is a fickle beast, looking as it does only at a 12 month period, and just as commodity price falls are starting to fall out of the equation now, so too a weaker sterling will fall out of the equation in due course, unless its downward momentum is maintained.

The Bank of England therefore will be happy to look through a bit of inflation as a temporary blip, and while wage growth remains anaemic it’s not likely to do an about-face on interest rate policy.

That doesn’t bode well for cash savers, who are used to low interest rates, but now also have to contend with the prospect of rising inflation chipping away at the spending power of their money on deposit."


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