Consumers braced as inflation rises

The insidious effects of higher air fares and rising prices in fashion and footwear have driven inflation up to 2.6% (CPI) and 3.2% (RPI).

by Rebecca Burn-Callander
Last Updated: 19 Aug 2013
The inflation honeymoon is officially over. According to the Consumer Price Index, which measures the cost of everyday purchases, Brits spent 2.6% more on their shopping in July, up from 2.4% the previous month. While over on the Retail Price Index, which includes mortgage interest payments and council tax, annual inflation is even more bloated, hitting 3.2%.

These rises are worrying news for the economy. The Bank of England uses CPI as the basis for its inflation calculations. The rate has steadily dropped since hitting the hellish 5% mark in July last year, but this latest rise moves the UK further away from the 2% inflation target set by the Monetary Policy Committee.

The figures have caught policymakers over at the bank unawares. In its August Inflation Report, the BoE predicted that inflation would continue to fall. Whoops. And this inflationary trend could be hard to shake off. The wet weather in the UK - and elsewhere - is set to affect harvests, and grain prices are already at an all-time high. Food prices could go through the roof as a result. Weak consumer demand, and a dearth of discounting on the high street (retailers have already shaved margins thinner than a damp receipt) are also likely to drive inflation yet higher over the coming months.

And that’s not all. Businesses and consumers were hit by yet more bad news following the inflation results. Rail fares, which are based on an RPI plus model, are set to rise between 3% and 6.2% in January. Caveat commuters.  

But there is a (very thin) silver lining to the inflation rise. Sterling has jumped on the news, which is good news for holidaymakers (although bad news for exporters) and, in the short term, the jump in CPI will ease the pressure on the bank to embark on more quantitative easing.

Let’s just hope the uptick is only temporary. If inflation continues to inflate, it will hurt consumer spending by squeezing take-home pay, causing real damage to the UK’s economic recovery hopes.  

 
Image: BigStockPhoto

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