Inflation holds firm at 2.8% as wage packets trail behind


The cost of living is still rising more than twice as fast as wage packets but there is some light at the end of the tunnel for beleaguered households, experts said today.

Official figures showed Consumer Prices Index inflation stuck stubbornly at 2.8% in March as soaring car insurance premiums cancelled out falling food and drink prices. Salaries rose by just 1.2% on average.

Analysts expect inflation to bust the 3% mark in the months ahead, as higher water bills kick in and the impact of the pound's fall this year feed through to the high street. 

But the UK's big four supermarkets rushed to cut at least 2p off petrol prices this week and economists say better news may be on the way from falling oil prices, caught up in a global commodity rout triggered by weak Chinese growth figures.

The FTSE 100 was on the back foot again today with mining stocks bearing the brunt of the sell-off.

Capital Economics' Samuel Tombs said: "Rising food prices and the approaching anniversary of a period of sharp discounting on the high street mean that the headline rate could climb to a peak of about 3.5% over the next few months.

"But the recent fall in oil prices to below $100 a barrel for the first time since last July has brightened the inflation outlook beyond that."

George Buckley, chief UK economist at Deutsche Bank, added: "We think there may be upside risk in the coming months but that may be more limited now given the 15% fall in oil prices since mid-February.

"So far petrol is down 2% but could continue to fall if lower oil prices are sustained."

There was also good news for the Bank of England's inflation-watchers as lower crude costs fed into the slowest rise in factory gate prices since last July, although the monetary policy committee still expects headline CPI to remain above its 2% target until the end of 2015.

Investec chief economist Philip Shaw said weak growth could yet persuade the MPC to pump more stimulus into the UK economy under new Governor Mark Carney, despite an "uncomfortable" inflation backdrop.

He said: "On balance we see the MPC under the incoming Governor backing two further tranches of asset purchases this year, eventually taking the quantitative easing total up to £450 billion from £375 billion currently.

Meanwhile London house prices grew at more than double the rate of UK inflation, rising 5.9% in the capital in the year to February.

But excluding the more buoyant markets in London and the South East, house prices overall rose by just 0.6% during the same period.