Financial indicator
UK inflation on the rise
UK inflation has risen again, reaching 3.7 per cent in April, up from 3.4 per cent in March and significantly above consensus expectations. At 3.7 per cent the rate of price increase is almost double the Bank of England’s 2 per cent inflation target.
There are a number of reasons behind the pick-up in the pace of price growth. The most significant is that some beneficial data from 2009, when prices were under strong downward pressure, have dropped out of the comparison. In addition there have been sharp increases in petrol prices, VAT has been increased back to 17.5 per cent and there are some effects from sterling’s weakness.
The Bank of England expects these pressures to pass and for the rate of price increase to moderate in an environment of slow economic growth with substantial underused capacity in terms of manufacturing output and the labour force. But the situation is not without risk.
The Bank has now written seven letters explaining why price rises are more than 1 per cent above the official target rate. Import costs are rising as sterling continues to decline and any increases in Duties or VAT in the Government’s deficit reduction programme will be directly reflected in the inflation rate – a rise in VAT to 20 per cent would push the CPI to + 5 per cent. It would be very worrying if persistent price pressures were reflected in wage demands.
One reason why unemployment growth has slowed is that wage pressures have been modest, an average +0.1 per cent in this downturn compared with +2.7 per cent in the 1990’s recession and 7.3 per cent in the 1980s. Pressure on wages to protect real incomes may therefore result in another phase of job losses.
John Kelly is head of client investment at CCLA
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