Perspective News

The UK is still living with the fallout from the financial crisis and the recession. Inflation continues to rise, the economy has shrunk, unemployment has increased and petrol prices have reached record levels. The Bank of England (BoE) expects inflation to continue its upward trajectory, peaking between 4% and 5% in the near term. Although the BoE believes inflation should eventually subside to its government-set target of 2% during 2012, it appears that the UK will have to endure a painful period of high prices and sluggish growth in the meantime. The rate of inflation reached 4% during January, fuelled by rising prices for food, oil and gas, an increase in VAT and a weak pound.

It is not yet clear whether British households will tolerate the squeeze on their purchasing power, or whether wages will have to rise. As yet, there is nothing to suggest that inflationary pressures are feeding through to salary increases. Average earnings grew at a rate of 1.8% in the three months to December, compared with growth of 2.1% in the three months to November. UK unemployment rose to almost 2.5 million in the final three months of 2010. The rate of unemployment currently stands at 7.9%, although youth unemployment is running at 20.5%.

The BoE is facing increasing pressure to increase interest rates as inflation continues to soar. However, BoE governor Mervyn King does not want to raise interest rates too quickly for fear of hurting the economic recovery. Mr King acknowledged that interest rates cannot remain at their current low of 0.5%, stating, “It is clear that at some point Bank rate will have to go up”. Nevertheless, he highlighted the “real differences” in opinion within the BoE’s Monetary Policy Committee (MPC), referring to a “wider than usual range of views” on inflation and economic growth.

The BoE warned that the economic recovery is “unlikely to be smooth”, but does not appear to expect the UK to experience a double-dip recession. The economy contracted by 0.5% during the final three months of 2010 and the outlook for economic growth has deteriorated. Sluggish economic growth could “push inflation well below target”; meanwhile, the BoE has stressed that “the outlook for growth remains highly uncertain”. Looking ahead, an unappealing combination of government spending cuts and the intensifying squeeze on households’ purchasing power appears likely to continue to dilute the potency of the economic recovery.

The contents of this article should not be construed as advice. Independent Financial Advice should always be attained in order to assess your own individual circumstances.