Published: Wed 15th February 2017
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Record High UK Inflation
According to The Office for National Statistics (ONS), inflation measured by Consumer Price Index (CPI) had reached the highest level in January 2017 (1.8%), since June 2014 – compared to 1.6% in December. The main drivers of inflation were: a weak currency and the rise in oil prices.
The Brexit referendum resulted in a sharp fall in the Pound Sterling, which consequently resulted in imports becoming far more expensive. In the UK, since a high proportion of income is spent on imported goods, we may expect a fall in consumption – therefore leading to a slowdown in economic growth (especially with consumption being approximately 65% of AD).
The Impact of OPEC’s Supply Cut
In January, the global oil supply fell by 1.5 million barrels a day (according to the IEA) and by 1.29 million barrels a day (according to OPEC). Even though this reduction is a little more than 1%, it resulted in higher oil prices – which have had a huge impact on production costs for businesses. This has put even more pressure on firms to raise the price of goods – thus passing on this increased cost to the consumers. Suren Thiru, Head of Economics at the British Chambers of Commerce, described higher inflation as “a major headache for businesses as it increases their cost base and weighs on investment decisions”.
The inflation rate is still within the boundaries of the Bank of England target rate (2%, plus/minus 1%). In fact, an economist at Fathom Consulting, Oliver White, stated that: “We expect headline inflation to break through the 2% target as early as February and keep rising to around 3% by autumn this year”.