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Oops! CPI inflation rises to 3.7%. Zimbabwe here we come

“Inflation will soon be in double figures” says Governor of the Bank of England. “We can’t raise interest rates. That’s the only thing preventing David Cameron’s fiscal policy turning the country into a total wasteland.” Well he didn’t actually say that, but he might have liked to.

The Governor’s mantra that inflation will eventually come down of its own accord, is becoming more of a prayer than a forecast.

Spend it quickly, while it is still worth something.

The facts are that CPI inflation reached 3.7% in December compared to 3.3% in November, with air transport, fuel, utility bills and food all combining to drive inflation much higher than analysts’ expectations. In fact transport costs rose by 12.9% last year while food and non-alcoholic drinks were up 6.1%. The Retail Prices Index, which excludes mortgage interest payments, also rose to 4.8% from 4.7%.

Are prices likely to fall over the next few months? Not a chance. VAT has just been raised from 17.5% to 20%. And the government has planned a nice 5p increase in fuel duty in April, which means that a litre of unleaded will require a mortgage to buy, except that mortgages are currently impossible to get.

There is a danger that this continued rise in inflation will raise inflationary expectations with a knock-on effect on wages. “Fortunately” there is so much slack in the labour market that wages are unlikely to rise by that much. Obviously, it isn’t fortunate for the workers who will be suffering actual cuts in real wages. Although I suppose they can be grateful that they actually have a job.

One result of these figures published by the ONS today is that the pound has risen against the dollar and other currencies on the foreign exchange markets. Doubtless this is in anticipation of a future rise in interest rates. But, this rise in the value of the pound will actually make our imports cheaper to buy in sterling, which in turn will help to put downward pressure on the CPI, and make it more likely that interest rates could be held. However, most commentators are forecasting a rise in interest rates between May and August this year.

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Posted in Bank of England, Consumer Price Index, Exchange Rates, Inflation, Interest rates

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