By Campaign Agent Michelle Blick
It was announced in December that CPI Inflation had risen to 3.1 per cent following its hike to a five year high of 3 per cent in October. The Consumer Price Index (CPI) is calculated by measuring the persistent price rises in the ‘Basket of goods’, consisting of a fixed set of common consumer goods and services ranging from milk to transport costs.
The Bank of England’s target rate for inflation is set at 2 per cent: a rate in which inflation is regarded as stable within the threshold of 1.0 per cent above or below, where no intervention is necessary. The recent surpassing of this rate signals instability, and the Governor of the Bank of England, Mark Carney will be forced to write to the Chancellor of the exchequer, Phillip Hammond, explaining the vast deviation from the target.
It is not since 2015 that the UK experienced a relatively significant deviation from the target rate, as deflation emerged for the first time since the 1960’s. This was largely supply-side deflation, due to a dip in fuel prices, retail discounts and supermarket price wars. Although lower than the lowest ‘safe’ rate of 1 per cent, falling prices coincided with economic expansion and thus were seen by many economists and politicians as a positive shock.
The dangerous surpassing of the 3 per cent mark in October was anticipated by Mark Carney, claiming that 3 per cent inflation was just the beginning of higher inflation figures. This is nevertheless concerning as 3 per cent was the highest rate that the UK had seen since 2012, and we are now experiencing figures that are above target.
The contentious 2016 Brexit referendum outcome is believed to be the biggest culprit in the price index soar, as inflation has grown by 2.6 per cent in the short space of time between the referendum and present day. This is due to Brexit’s impact on the value of the pound. The sharp fall has caused imports to become more expensive, having a knock-on effect on household items, most notably supermarket food prices and transport costs.
With the exception of pensioners, who in October saw a 3 per cent rise, and will now see a 0.1 % rise in their pension due to the ‘triple-lock’ guarantee; This rise will continue to negatively affect most groups of consumers as real wages continue to fall and prices continue to rise.
The Bank of England’s Monetary Policy Committee (MPC), in November, reacted to the previous rise by increasing the interest rate from 0.25 per cent up to 0.5 per cent, reversing the post Brexit decrease. The higher rate, voted for by the MPC, is anticipated to be the first of many between now and 2020, although no additional increases have since been announced yet.
It is uncertain whether inflation is close to its peak or not, but it is clear that these growing levels must be contained. Further interest rate rises seem necessary in the light of the 3.1 per cent figure, in order to maintain the Bank of England’s credibility and reputation as well as make households better off. This unpopular response however is at a trade off with high consumer spending and high growth, needed as the lifeblood of the UK economy.
Sources and Further Reading
- UK inflation breaches target as it climbs to 3.1%, Financial Times (12 December, 2017)
- Consumer Price Index, Investopedia
- Mark Carney forced to explain why inflation has broken target, The Telegraph (12 December 2017)
- UK slips into deflation as prices fall 0.1%, Financial Times (19 May 2015)
- UK interest rate rise likely as inflation hits 3%, The Guardian (17 October 2017)
- Consumer Price Inflation, Office for National Statistics (July 2016)
- Poor households hit hard as UK inflation sticks at five-year high - as it happened, The Guardian (14 November 2017)
- UK interest rates rise for first time in 10 years, BBC (2 November 2017)