The troubling rise and rise of inflation

Business & Economy 13 Jun 2017
The troubling rise and rise of inflation

Higher prices, uncertain times: The troubling rise and rise of inflation

A cocktail of fun and frippery has helped lift inflation to 2.9% but now the UK faces the serious spectre of a household squeeze.

Image: Higher priced holidays have contributed to rising inflation

By Adam Parsons, Business Correspondent

It was back in July 2013 that Justin Rose won the US Open and Julia Gillard resigned as Australia's prime minister.

Serena Williams won the French Open and, in Britain, inflation had gone up to 2.9%.

Very nearly four years later, and it's gone back there.

A figure of 2.9% was higher than most had predicted. In fact, just about everyone seemed to think it would hold steady at last month's mark of 2.7%, but instead inflation carried on rising.

:: Inflation up to near four-year high of 2.9%

Toys, games, chocolate and holidays all pushed it up – a cocktail of fun, frippery and treats that's now starting to look like something altogether more troubling.

Inflation is not a problem in itself. Most people accept that economies need a bit of inflation, to keep us spending, to allow wages to grow and to encourage growth.

Certainly successive UK governments have gone along with this, deciding that one of the core tasks of the Bank of England should be to target inflation of 2%.

It is a Goldilocks aspiration – inflation that is neither too hot, nor too cold. The problem is that, right now, it looks a bit too hot.

The new £1 pound coin is seen alongside US dollar bills and euro notes on April 4, 2017 in Bath, England
Image: The pound has fallen sharply against the dollar since the Brexit vote, adding to inflationary pressure

When inflation outstrips wage growth, that means that we feel a bit poorer.

We don't get the latest data about wages until Wednesday, but it's almost inconceivable that wage growth has gone up by anything like as much as inflation.

Last time round, figures showed wages were already lagging behind – this time, the gap will probably be at least as wide.

So we're being squeezed, which carries implications for the economy and also for the complex political landscape that we're presently facing.

Put simply, governments rarely prosper at times when real wages are being squeezed – many of us tend to feel poorer, and a bit more unhappy.

And at times like that, history suggests that voters often turn against the incumbent government.

So what to do? Well, the textbook solution to rising inflation is to increase interest rates.

The Bank of England lowered the base rate of interest after the UK's Brexit vote in 2016
Image: The Bank of England targets inflation at two percent

That way, we're tempted to save a bit more, spend a bit less, and that brings down inflation.

The problem with that logic is that the Bank of England's job isn't just to manage inflation, but also to take a view about the whole national economy.

It worries about slowing growth, and, ever since the Brexit referendum, it's been apparent that the Bank has no intention of raising rates unless it absolutely has to. And we're not at that point now.

The Bank predicted that inflation would peak at 2.8% later this year.

Well, that prediction now needs a rethink, with plenty of City economists now tipping it to go just beyond 3%, but the idea that we're near a peak has plenty of support.

Much of the inflation that's in the system is a result of just one thing – the sharp fall in the value of the pound that followed the referendum, causing import costs to rise steeply.

Christmas shoppers pack the streets of Nottingham
Image: Consumer spending is slowing

Inflation only looks back a year, though, so once we go past the anniversary of the referendum, the immediate after-effects will start to gradually disappear out of the equation.

So will we see inflation falling? Most economists predict exactly that, but they are a little cautious.

Consumer spending has propped up the UK economy for a long time, and now we're seeing that slowing.

Yet at the same time, we're still spending huge amounts on credit cars, and saving comparatively little. That, on the face of it, looks a dangerous combination.

The most important element, of course, is Brexit – and what those negotiations deliver.

Those talks will shape the future of our economy and, right now, nobody knows what they will deliver. These are uncertain times.

Original Article

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