Savers and families hit – interest rates on hold, inflation hits 3.1%
The squeeze on families continues as the Office for National Statistics (ONS) announced that inflation as measured by the Consumer Price Index (CPI) rose to 3.1% in November, the highest in nearly six years; it said that food, airfares and computer games contributed to the increase.
The latest increase is set against recent data that showed that average weekly wages are growing at just 2.2%; because CPI has exceeded 3% the governor of the Bank of England, Mark Carney, will have to write to Chancellor Philip Hammond to explain the reasons for the latest increase and what the Bank intends to do in order to steer inflation back towards its 2% target.
As widely predicted the Monetary Policy Committee (MPC) today announced that interest rates would be kept at 0.5%, meaning that with very few exceptions, savers will be getting poorer in real terms.
The last time Mr Carney had to write to the chancellor was in December last year when inflation came in under its lower threshold of 1%; he had been widely reported as predicting that inflation would peak in October or November, so the latest hike will come as a disappointment to him and as a concern to commentators.
Writing for the BBC, economics correspondent Andy Verity believes that the fact that 3.1% represents a six year high for inflation is an indication that levels have been low over a long period of time; at its peak over the last decade, inflation hit 5.2% in 2011, but still way below levels experienced by those that lived through the 70s and 80s, when inflation hit 15% in October 1989.
However, a key difference is that back then wages were also rising, usually faster than prices; bigger price rises led to bigger pay rises, forcing many employers to charge higher prices to cover their higher labour costs.
However, that ‘wage-price spiral’ is no longer applicable which means that as inflation rises living standards tend to get squeezed; the Bank of England is therefore unlikely to be unduly exercised if inflation rises still further or remains above its target, so further interest rate rises are unlikely any time soon.
Commentators appear divided as to whether inflation has now peaked or not, but some recent surveys suggest that service sector costs and prices are on the rise which could feed through to inflation overall.
Underlying inflationary pressure came from food, which at 3.6% was the highest rise since 2013, and airfares, which actually fell in November, but not by as much as they fell last year.
Rising food prices are often seen as an indicator of pain in the cost of living and tends to precipitate cuts in spending elsewhere; this will not be greeted as good news by retailers that had already been struggling on the run up to Christmas.
Families will not welcome the fact that Christmas just got more expensive and analysts will be eagerly awaiting employment and wage data to see if there is any news to lift the gloom.
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