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Inflationary challenges

 

It was announced this week that the UK’s inflation rate as measured by the Consumer Prices Index (CPI) had risen to 3%, the highest level since 2012.  The bank of England has the task of keeping CPI at 2%.

The figure is significant for a number of reasons. Under the ‘triple  lock’ guarantee, the basic state pension rises by a rate equal to September’s CPI rate, earnings growth or 2.5%, whichever of these figures is the greatest. Therefore, pensioners will receive a 3% increase next April, a much more generous rise than average earnings growth which is currently running at 2.1%.This will only serve to increase the generational wealth gap that we are currently experiencing.  The UK workforce continues to experience falling pay, when adjusted for inflation. The average worker earns less in 2017 than in 2006 when taking into account the rise over that time in the cost of living. 

Business rates are linked to the Retail Prices Index (RPI), which has historically risen at a faster pace than CPI.  This means that business rates will increase by 3.9%.

One of the main reasons for the spike in inflation has been the devaluation of the Pound and the subsequent rise in the cost of imported goods and services. In September, inflation was pushed higher by both food prices and transport costs.

Over the last few weeks the Governor of the Bank of England has readied financial markets for a rise in interest rates.  However, although most economists expect a rise in interest rates to 0.5% from 0.25% in November, there are some doubts whether the rate setting committee will go ahead given the challenges facing the UK. 

The main challenge will continue to be the uncertain outcome of the BREXIT negotiations.  Other significant challenges include weakening economic growth, poor productivity and signs that the UK consumer is reigning in their spending due to high debt levels and stagnating wage growth.

Inflation will continue to challenge policy makers. Historically, interest rates have been an effective tool at keeping inflation in check.  However, with the UK economy facing slowing growth, high debt levels and exit from the EU, some fear that an early rate rise would push the economy into recession.   Interest rates in the UK have not risen for 10 years, November could prove to be a significant month for the post financial crisis economy.

 

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