UK inflation exceeded forecasts as it jumped 1 per cent in September from 0.6 per cent in August, reaching its highest level in two years.
According the latest figures from the Office for National Statistics published today, input prices rose an annual 7.2 per cent in September after a 7.8 per cent jump the previous month.
Hargreaves Lansdown senior economist Ben Brettell says inflation could easily exceed the 2 per cent target in 2017, which is “not good news” for savers and people with lower income.
The main upward contributors were rising prices for clothing, overnight hotel stays and motor fuel.
Crude oil also pushed up prices increasing 14.2 per cent year-on-year in September, the highest since 2012.
The ONS says the increase in producer price inflation over recent months can be “partly attributed to the changes in the sterling exchange rate”.
The new data comes after Bank of England governor Mark Carney said consumers will face difficulty going from “no inflation to some inflation”.
The ONS says a fall in air fares and food prices partially offset the rise in inflation.
Food prices fell by 0.3 per cent between August and September, compared with a rise of 0.1 per cent a year ago. However, the office said the slight decrease in prices was was mostly offset by rising prices for non alcoholic beverages.
Brettell says structurally there are very few inflationary pressures in the UK, partly due to demographics.
He says: “The baby boomers are starting to retire in their droves. They have already gone thorough their consumption phase – they have bought their houses, cars and consumer goods. The generation behind them is saddled with debt and struggling to get on the housing ladder.
“There is also no sign of any tightness in the labour market, with wage growth seemingly set to remain depressed. All this should mean less inflationary pressure, lacklustre economic growth, and little upward pressure on interest rates.”
Inflation protection: Back to cash and bonds?
AJ Bell investment director Russ Mould says “too much inflation” could encourage the BoE to raise interest rates and investors could be tempted to invest into cash or bonds.
He says: “If too much inflation causes the Bank of England to raise interest rates or drives government bond yields higher then investors could be lured away from stocks and back toward cash or bonds, removing some of the support given to share prices by the premium yield that is currently available from equities.”
But Chelsea Financial Services senior analyst James Yardley says cash might be “the worst asset class” in inflationary periods.
For example, if inflation rises to between 2-3 per cent without an increase in interest rates, £100 could be the equivalent of just £86 in five years time.
He adds: “Inflation is also the enemy of bonds. Because the income paid by bonds is usually fixed at the time they are issued, high or rising inflation can be a problem, as it erodes the real return you receive.”
To protect from rising inflation he suggests the AXA Sterling Credit Short Duration Bond fund, which only invests in bonds close to maturity, or index-linked corporate bonds, although this can also be very volatile and give negative real yield returns.
Yardley adds: “Alternatively you could invest in a bond that has a high yield, which may provide a bit of a buffer against the effects of inflation. GAM Star Credit Opportunities is worth a look and has a yield of 4.5 per cent and Invesco Perpetual Monthly Income Plus is also an option, with a yield of 5.5 per cent.”