Perspective News

The annual rate of inflation increased to 4.5% during April, compared with 4% in March. The Consumer Price Index (CPI) reached its highest level since October 2008. Inflation registered a month-on-month rise of 1% during April – only the second time that prices have risen by as much as this in a single month. However, the Retail Prices Index (RPI), which includes mortgage interest payments, posted a slight decline, falling from 5.3% in March to 5.2% in April.

Inflationary pressures were fuelled by price rises for alcohol and tobacco and higher costs for air and sea transport. Air transport prices posted a 29% rise during April, while alcohol and tobacco increased by a record 5.3%.

The figures were distorted to some degree by the late Easter holiday; Easter fell in March last year, and this partly accounts for the substantial monthly rise. The increase was further exacerbated by unusually warm, dry weather, the school holidays and Easter’s close proximity to other bank holidays.

Inflation has remained one percentage point or more above target every month since January 2010, and continues to run far ahead of the Bank of England’s (BoE’s) government-set target of 2%. Once again, BoE Governor Mervyn King found himself obliged to write an official letter to the Chancellor of the Exchequer to explain why inflation has remained above the margin of 1% above target. He cited January’s increase in VAT, higher energy prices and increased import prices.

While inflation continues to surge, wages (excluding bonuses) are rising by only 2.1% for the three months to March 2011, squeezing UK households that are already grappling with rising prices, high unemployment and a sluggish housing market. The respected Ernst & Young ITEM Club expects consumer spending to rise by only 2% a year between 2011 and 2020. Debt repayments, high inflation and a lack of credit, combined with the prospect of higher interest rates, are expected to hamper consumers’ ability to spend. The study pointed out that 70% of homeowners have tracker mortgages, and therefore UK households are very sensitive to interest-rate rises.

The BoE is now under renewed pressure to increase interest rates, which have remained at an all-time low of 0.5% since March 2009. The BoE expects the rate of inflation to reach 5% later this year, although it is expected to subside toward the target rate in the latter part of 2012.

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