By: Dr. Mike Campbell
Figures releases by the Office for National Statistics reveal that UK inflation, measured by the consumer price index, rose by 0.4% in December to stand at 3.7%. The Bank of England is responsible for the monetary policy decisions which should keep inflation in check at, or below, its target value of 2%. In the aftermath of the global financial crisis, UK inflation has been above the threshold for the last 13 months by at least 1%.
The broader based Retail Price Index (RPI) which includes items such as mortgage interest costs, also rose in December, climbing to 4.8% from 4.7%. The RPI figure for the year as a whole was 4.6%, the highest annual rate seen since 1991. RPI is used in wage increase discussions and could force wage settlements higher which, in turn, may increase inflationary pressure within the economy.
The UK government has increased VAT (a sales tax) from 17.5 to 20% from this month. The move will almost certainly send inflation higher, although many retailers have discounted products and “paid” the VAT increase themselves. With winter sales in full swing, it may take a while for the impact of the rise on the consumer price index to be felt.
The Bank of England may feel pressure to raise bank interest rates to curb inflation. Such speculation has led to a rally of Sterling against other major currencies. However, some analysts have pointed out that government austerity measures will lead to a cooling of the economy which may slow inflation as a consequence. Higher interest rates could stifle the recovery, so the Bank is likely to adopt a wait and see policy over the next few months.