By: Bill Blevins
UK inflation hit 3.1 per cent in March, its highest level since comparable records began in 1997, breaking through the three per cent barrier whereby the Governor of the Bank of England, Mervyn King, has to write a letter of explanation to the Chancellor of the Exchequer, Gordon Brown.
The news caused Sterling to hit the two Dollar mark, for the first time since September 1992. Fierce speculation also abounded that May’s bank interest rate would jump a half point to 5.5 per cent and possibly even spike to six per cent.
Travel agents are expecting a surge in holiday and shopping trips to the USA. Bookings have already risen by 30 per cent recently as the Pound nudged towards two Dollars. Imported goods from America will be cheaper but exports more difficult as the price of British goods increase.
Inflation report
UK inflation was higher than the EU27 March inflation rate of 2.2 per cent. Nevertheless, the EU inflation rate is still above the European Central’s Bank (ECB) target of two per cent and ECB interest rates rose to 3.75 per cent in March. Is this a frighteningly growing trend in Britain and EU countries – that inflation is now spiralling out of control and bank interest rates will steadily climb to restrain them?
The Monetary Policy Committee (MPC) was set up 10 years ago and it stipulates that if the rate of inflation goes one per cent either way of the official two per cent inflation target, the Governor of the Bank of England must write to the Chancellor and explain. This is the first time that King has had to do this. In his open letter King writes:
“…As discussed in our February Inflation Report, part of that rise reflects an unexpectedly sharp increase in domestic energy prices during the second half of last year, more than offsetting a fall in petrol prices. Part reflects a rise in food prices caused by a weather-induced global reduction in supply. But, taken together, those factors account for only around one half of the pick up in CPI inflation over the past year.
“…February Sterling oil prices have risen by around 25 per cent … higher petrol prices contributed significantly to the pick up of inflation in March….
“Because there are long lags between changes in interest rates and their impact on inflation, the Committee will continue to look through the short term volatility in inflation over the next year or so resulting from fluctuations in domestic energy prices and set Bank Rate to keep inflation on track to meet two per cent target in the medium term”.
Basket of goods
Some analysts also blamed the price of food, furniture and petrol for the UK’s 3.1 per cent inflation high, up from 2.8 per cent in February and 1.8 per cent a year ago. According to the Office for National Statistics (ONS) the largest consumer price rises was from food and non-alcoholic drink. Shop bought milk prices increased by over two per cent in March and there were smaller increases in bread, cereals and meat. The cost of furniture and furnishings was rising at the rate of a record 10 per cent per month. Petrol prices had risen by 2.5 pence.
The Consumer Price Index (CPI) is the main measure for inflation in the UK and is based on a set ‘basket of goods’. Interestingly, as a sign of the times, for 2007 the basket of goods saw the addition of satellite navigation systems, small flat panel televisions, mobile ringtones and digital radios. Out went the video recorder, portable television, Walkman cassette player, 35mm compact camera and ghetto blaster. Olive oil replaced vegetable oil and courgettes replaced Brussels sprouts. Items are only added to the basket of goods when spending on them has hit a certain level.
The Retail Price Index (RPI), which rose to 4.8 per cent in March, its highest since 1991, includes indexation of pensions and state benefits. The CPI and RPI are compiled each month using the same underlying price data, based on a representative selection of over 650 goods and services in 150 areas in the UK.
The CPI’s basket of goods is considered by commentators not to be a realistic representation of goods on which certain categories of consumers spend their money. There is a difference, for example, between what middle earners and pensioners purchase and it is widely accepted that the published rates of inflation are well below the real rate of inflation for these groups.
According to The Daily Telegraph “the cost of living is rising at almost double the rate of inflation for many middle class families”. Statistics produced for the national newspaper, based on a typical shopping basket of goods and services for middle Britain, showed inflation rising from 5.4 per cent last October. The research revealed that some pensioners experienced inflation of 8.4 per cent in March due to higher electricity and gas bills over the past two years. The rate was down from 8.6 per cent in February as energy price inflation dropped back slightly. In December the Telegraph reported that the real rate of inflation for pensioners was actually nine per cent.
Age matters
Latest figures from the Alliance Trust Research Centre’s monthly “Age and Inflation” alert reveals that, in March, the rate of inflation for those aged over 75 was 4.7 per cent – 52 per cent higher than headline inflation of 3.1 per cent – and that households where a person aged over 75 was the head have consistently faced inflation of more than three per cent over the past year. Households in the lowest income group face inflation of 4.3 per cent to 39 per cent higher than the headline rate.
British expatriates would do well to keep an eye on the UK’s inflation and interest rates as the Eurozone could be following closely behind them.
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