UK inflation rates have unexpectedly risen to 3.5% despite rising unemployment and stagnating economic growth. This is another blow to the embattled Conservative Chancellor, George Osborne who continues to take a hammering following his budget last month. Furthermore it will require the Bank of England’s Governor, Sir Mervyn King, to have to write a letter to the Prime Minister, David Cameron, detailing why UK inflation is above the Governments target of 2%, a figure that the Bank has failed to meet for almost 5 years.
Since 1997 when Labour came to power under Gordon Brown the Chancellor, the Bank of England have been required to maintain inflation under the Governments target of 2% using only interest rates and through quantitative easing which the Bank has done since the financial crisis of 2007. The inflation figures measure the difference between current prices and prices of a basket of goods and services from 12 months ago.
The Office of National Statistics published the poor results, much to the surprise of City experts. The majority of whom believe that this small rise will only be a slight blip in the downward trend in UK inflation that has been seen since September last year.
The rise has been put down to the growth in food, clothes (in particular women’s clothing) and soft drinks in comparison to prices a year ago, in March 2011. Supermarkets 12 months ago were involved in a particularly strong price war which suppressed food prices, mainly meat, fruit, vegetables and bread. To a lesser extent, but still importantly computer games, clothing and DVDs also affected the rise in UK inflation. This rise will add additional pressure to the Government as inflation affects consumer confidence places additional strains on households whose salaries are not rising at the same rate as their household costs.
Fortunately, fuel prices (gas/electricity) were markedly lower than 12 months ago due to energy companies reducing prices against raising prices a year ago.
Whilst the consensus in the City is that this rise is not in line with the downward trend the fear is that it will motivate the Bank of England’s Monetary Policy Committee to hold off from another period of quantitative easing. Between March 2009 and May this year the Bank has established a £325 billion quantitative easing program. The fear is that this has not had the required effect and any high inflation rate will dissuade the Bank to reduce interest further and subsequently increase its quantitative easy program any more.
These results follow on the back of the average annual salary growth rate figures of only 1.4% in the UK and average prices have only been growing by a paltry 0.3%. All leading to a squeeze in consumer spending further stifling the economy. It is hoped that with the upcoming Diamond Jubilee and London 2012 Olympics that this will provide a boost to the economy, however these are only a few lights on the horizon.
The recent poor economic data will not be helping the Coalition’s beleaguered government and as a consequence it is predicted that both the Liberal Democrat and Conservative parties are going to find it challenging in the upcoming local elections on 3 May 2012.
For more information on the current state of the UK economy please click here.