Inflation rockets to 4%

Rights, Scams and Politics

John Fitzsimons
Updated on 16 February 2011 | 17 Comments

Inflation now stands at double the Bank of England's target.

The Office for National Statistics has confirmed that the cost of living has jumped yet again, with the Consumer Price Index (CPI) annual inflation rate rising to 4% - double the Bank of England’s target.

The figure represents a rise from 3.7% in December, with CPI now at its highest level since November 2008.

A second measure of inflation, the Retail Prices Index (which includes things like mortgage costs) also rose in January, to 5.1% from 4.8% in December.

What it means

Inflation, very simply, tells us how the general cost of living is changing.

The Office of National Statistics uses a basket of goods to calculate how prices have changed over the month. And with inflation consistently on the rise over the last couple of years, it tells us that everyday life is getting more expensive.

The losers

All sorts of different people suffer when inflation is rising. All of us on stable salaries are losers when inflation jumps – while the cost of living goes up, our salaries do not. As a result, your money does not stretch as far as it did previously.

This puts pressure on employers to increase pay, meaning they face higher costs, which can force them to put up prices... and so the inflationary spiral continues.

Why it’s rising

So, why is inflation on the rise to such a degree? According to the Office of National Statistics, there are a number of factors behind inflation heading north.

Transport

Firstly, there are transport costs. There is the price of oil, which has led to petrol prices reaching an average of £1.27 per litre, a new record high. But you also have to take into account the rise in fuel duty, while the costs of purchasing a new car have jumped 2.4% from December to January. Indeed, even the price of second-hand cars has increased by 2%.

Booze and fags

The cost of alcoholic beverages and tobacco rose by a record 4.6% between December and January, with whisky and vodka prices in particular rising sharply. And tobacco products jumped 2.9% too.

Restaurants and hotels

Within this category, prices rose by 1.3% between December and January, another record monthly increase. Once again, the rising prices of alcoholic beverages played a big part in this.

Sterling

Add to all of this the fact that the value of Sterling has been pretty poor for quite a while now. As the pound gets weaker, it doesn't stretch so far, further pushing prices up.

The role of VAT

Now, many people, including the Office of National Statistics itself, is pointing the finger at this year’s rise in VAT to a rate of 20%.

And clearly, it does not help. After all, there was a 2.5 percentage point rise in VAT in January last year too, and CPI inflation at that point jumped to 3.5%.

However, there is an argument that VAT on its own will not boost inflation. Inflation is an annual measure of the rise in prices, and as there was a 2.5 point rise last year too, it simply means that inflation will not fall compared to last year, rather than that it increase further.

What happens next?

The Bank of England is tasked with keeping inflation under control, and operates with a target of 2% for CPI. However, inflation has been at least 1% ahead of this target for more than a year, putting pressure on the Bank of England to act.

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Mervyn King, the governor of the Bank of England, has to write to the Treasury when inflation reaches a level 1% above target, and then every three months afterwards, to explain why inflation is rising and what the Bank of England plans to do about it. Needless to say, Mr King has been writing a lot of letters of late.

The most obvious course of action for the Bank of England to take would be to increase bank base rate, a traditional measure to dampen inflation. However, that appears unlikely, for the time being anyway. In his letter, King highlights that while inflation is likely to rise to nearly 5% in the coming months, that will be largely due to rising commodity and energy prices, and that such factors will wane in time, bringing inflation back under control.

It’s worth noting however that King acknowledges there are differences within the Monetary Policy Committee over what to do next. As a result, imminent rises in base rate cannot be completely ruled out.

Can I do anything?

In truth, there’s not a vast amount that you can do about inflation. If you have cash in savings, it’s well worth spending a bit of extra time to ensure you find an account that will beat inflation, limited though your choice may be.

And it’s worth looking at ways to cut your cost of living. That could mean downgrading from your current supermarket of choice, switching your energy provider or broadband deal, or just using your car as little as possible.

Sadly, inflation is not going anywhere for a while.

More: The new savings account that beats inflation | Seven ways to maximise your savings in 2011

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Comments

Aquasponge
21 February 2011
Gr8it, I like your idea. It is well thought through. No matter how you wrap it up though, any idea that taxes future income or pushes current cost into the future (PFI) is stealing from future generations. Having said that, we are almost on the same page. If you agree that an asset only has value because of its future income generating ability or future sales value, then why not shift the tax burden. Why not match the assets value to the tax receipt. Same result but the people who benefit from the asset/gain would also pay the cost. Shifting losses onto future generations or privatising profits and socialising loses drives the wrong behaviour. Taxing income, whether current or future, produces unproductive assets. We currently have over 600,000 empty homes in this country (some figures point to a much larger number) – enough said. I’ll finish with a summarised version of the Jubilee line in London. The Jubilee line cost c.£6Bn to build and was funding, in large, by general taxation. This meant that people all over the country paid higher income tax, corporation tax, VAT, fuel duty, etc. etc.. Most of the people who paid the higher tax burden will never use or benefit from the investment. The people who benefited most from the investment were the people in London that lived along or close to the new line. The properties along the Jubilee line increased in value by over £10Bn directly due to the £6Bn investment. Taxing this increase in value would still generate a £4Bn capital increase to the owners along the line and everybody else could enjoy lower taxation. In summary, don’t tax the future income generating ability of the asset – tax the current value of the asset. Of course, amassing unproductive assets and avoiding taxation is what a lot of people have enjoyed for years, so why rock the boat? 
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gr8it
20 February 2011
[url=../../../../profile/Aquasponge]Aquasponge[/url] you say the solution I posted was stealing from the future, think again. The money from future tax receipts is already earmarked to pay the interest we are accruing on a debt we are not repaying. I am suggesting that for the people with money in the bank earning 0.2% interest and with the UK debt costing the tax payers a great deal more as we owe the money to foreign investers, we pay the interest into our own economy (our savers and cash rich) with a lesser margin that we are paying overseas, and at the same time, we repay that foreign debts. This reduces future interest in 'potentially' one very quick step, the difference is that the interest stays in the UK and boosts the economy.  The last Labour government has already committed the UK economy and tax payer to steal from the future generations, I'm giving them a solution to pull us from the abyss and improve the UK economy immediately. Its wooden dollars but it produces a magic trick.  We've already spent it and its costing us money, so pay it off now with the receipts that would otherwise not be here for up to 5 years. Once the balance shows £0 or goes into the black, we immediately remove the burden of interest on the UK economy, which is every man woman and child £3000 per year each. Or to put it another way, £10,000 per year for each household. Frankly, I dont know many households that earn enough to pay £10,000 in tax every year, so this is an accumulative problem, its not getting smaller and cutting services is just pissing in the wind and crippling the economy.  Dont just criticise an idea because its innovative, if you have a criticism with an idea, explain why it wont work and if your argument is sound, I will think again.
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dmhzx
19 February 2011
All that putting up interest rates will do is to give even more money to the parasitic banks It will have no effect on inflation because most of it is driven by speculators (commoodity proces) and our own goovernment. - Commuting costs by car or public transport, are fundamentally governemnt controled. VTA and duty rises Of ocurse all he financil people are in favour of interest rises. How else can they continue to get 40% pay rises each year? Thank goodnees Mervyn King is (for the time being) looking after the interests of the whole country. -Shame that the government isn't.
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