THE ANNUAL INFLATION rate, as measured by Consumer Prices Index (CPI), crept up to 3% in September – taking the rate up to a level not seen since April 2012, when the Tory-led Coalition Government was just getting into its stride.
The rise in annual inflation – up 0.1% since August – has largely been fuelled by increases in transport costs and food prices. It would have been worse but for the cost of clothing, which rose by less this year than last year, when a high increase helped push inflation upwards.
Overall, the increase is bad news for the economy and won’t be welcomed by the Government – but there is a tiny drop of good news behind the increase.
The increase in inflation puts more pressure on the Bank of England to increase the basic interest rate in order to discourage people from borrowing to buy things and pushing up inflation even further. However, the Government strategy for reviving the economy is to rely on more people buying more things. Oops.
Inflation is no running at nearly 1% more than the growth in wages. As the buying power of people in work decreases, demand will drop – bad news for a Government relying on domestic demand to increase in order to boost the economy overall.
As inflation increases, so the cost of everyday necessities will increase – so your weekly or monthly shop will cost more.
This will probably lead to an intensification of the supermarket price war, as the major grocery retailers jostle to win your custom. Again, though, a short term cut in prices of top selling items will hit supermarket profits, so it can’t last.
Any rise in the basic interest rate is going to see the cost of mortgages going up, which will see more house owners struggling to meet monthly payments – to the point where some of them will fail. Building societies will probably be as flexible as possible, at least initially, as they don’t want the number of repossessions to rocket upwards – which would dent confidence of new buyers. However, they won’t be able to hang on forever, and they will be under strong pressure to repossess home and sell them on while prices are still high. If prices were to drop, this could trigger a major economic collapse – as happened in 2008.
The annual increase in pensions and benefits is set according to the CPI in September – so a high increase in September, like the one we have just had, means a high rate of increase for pensions and benefits.
Sadly, a high increase in pensions and benefits arising out of a high rise in prices is fairly meaningless, as the pensions and benefits increase is swallowed up by the same higher prices which led to the higher increase. Pensioners and those on benefits would only benefit from the high increase in income if the September CPI is a one-off, with inflation then declining. This is unlikely.
It’s also bad news for the Government, which is trying to cut the overall amount of money paid out on benefits and state pensions. While individual payments may have to go up, look out for the Government to fiddle with entitlement to keep its overall costs down.
The other payment dependent on inflation is the Business rate, which increases by the rate of September’s Retail Prices Index (RPI) increase. The RPI is a slightly different way of measuring inflation – and September’s increase pushed the annual RPI up to 3.9%. Expect businesses to pass the increase on to consumers, pushing prices up again and putting us on track for a large increase in the RPI next year, which will pushing prices up again, which will… carry on until something gives and crashes.
The Government is struggling to find a way out of the economic legacy left by the 2008 global financial crash. This uncertainty leaves the way open for the far right to push their views that immigrants and/or black and Asian people are to blame for everyone being worse off. They are making serious advances on mainland Europe. We don’t want to see that echoed in the UK.