Market Insight - May/June 2018
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Is the living squeeze over?

Inflation, which measures the average change in prices of goods and services, slowed to 2.5% in February. The Consumer Prices Index including housing costs (CPIH) measure of inflation fell from 2.7% in January to 2.5%, the lowest level since March last year. This is good news for households as it means the average costs of goods and services aren’t rising as quickly as they were.

The fall in inflation was mainly caused by prices for transport, food, restaurants and hotels rising less than last year. February’s fall suggests that the UK has past peak inflation and price rises will ease over the next few months. Inflation rose last year on the back of sterling’s decline following the EU Referendum as the cost of imports rose. But now we’re further down the line, the index is comparing prices in February 2017 with prices in February 2016, which means that average prices aren’t being compared with pre-referendum lows which inflated the figures.

The good news for households is that the latest data for earnings and inflation suggests that the squeeze on incomes could be coming to an end. Inflation has been rising faster than earnings over the last year, which has squeezed household’s disposable incomes. But with wage growth rising to 2.8% in January when inflation slowed to 2.7%, we could start to see real incomes rise again soon if the trend continues.

We shouldn’t get too excited just yet, though. Wages have got a lot of catching up to do and any future fall in inflation is likely to be slow and gradual. Overall, this is good news for households and means that families might have a little more left over at the end of the month.

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