Citywire for Financial Professionals
Stay connected:

View the article online at http://citywire.co.uk/money/article/a658382

Hic! Rising cost of a tipple keeps inflation high

The squeeze remains on consumers as UK CPI inflation stays stubbornly at 2.7%

 
Hic! Rising cost of a tipple keeps inflation high

The rocketing price of spirits kept inflation stubbornly above 2.7% in January, with higher tobacco and food prices also requiring consumers to dig deeper into their pockets.

January’s annual consumer prices index (CPI) reading means the government’s preferred measure of inflation has been above the Bank of England’s 2% target for 38 months, having stayed at its current level for four months. The broader retail prices index (RPI) rose to 3.3% from 3.1% in December.

‘It is becoming increasingly expensive to drown one's inflationary sorrows,’ commented Nomura analyst Philip Rush of a 9% rise in alcohol prices. ‘Strong global demand for whisky has been creating shortages that may be finally starting to squeeze consumer prices.’

Utility prices and education costs also rose. Conversely, falling clothing and footwear prevented the overall index from moving higher.

Economists said inflation was likely to remain above target this year, possibly hitting 3%, but that this would not prevent the Bank of England from providing more economic stimulus if the UK economy continues to struggle. So far the Bank has spent £375 billion on bond purchases under its quantitative easing programme, but the economy remains subdued, having contracted by 0.3% in the last three months of 2012.

‘Forthcoming gains in petrol prices are likely to prevent any real decline in headline CPI inflation, which we expect will continue to average 2.7% this year – with a good chance that the CPI briefly picks up above 3% in the summer owing to an uneven pattern of price discounting,’ commented Allan Monks of JP Morgan.

Clues as to the monetary policy committee’s next steps will be provided tomorrow when the quarterly inflation report is published, a closely-watched update on the Bank’s forecasts for economic growth and inflation.

Michael Saunders of Citi said that Bank of England rate-setters shouldn’t actually attempt to hit their 2% inflation target in the face of rising utility bills. ‘The inflation remit should, in our view, be changed or interpreted very flexibly to allow the MPC to look through such tax-driven and regulatory-driven inflation for a long period,’ he commented.

But the elevated inflation rate, coupled with worsening savings rates being provided by banks, means savers will find it even tougher to maintain the value of their savings. Basic rate taxpayers now need a rate of 3.39% to gain benefit in real terms, increasing to 4.51% for higher rate taxpayers. There are only six easy access ISAs and one fixed rate ISAs available that beat inflation, according to data from MoneySupermarket.

See: 'Will poor cash ISA rates shock you into stocks and shares?'

6 comments so far. Why not have your say?

Jonathan

Feb 12, 2013 at 15:55

Come on now, let's be honest about the root cause of inflation:

The BoE printing money for QE.

report this

DOH

Feb 12, 2013 at 18:39

The reality is that the MPC is no longer about maintaining control of inflation (CPI) at or below 2% as was supposed to be their primary objective.

They seem to have stretched their mandate to include supporting the government in its strategy of inflating away the national debt.

This is clearly the main purpose of QE and ultra low interest rates.

Why do the authorities claim otherwise in the form of not being able to control imported inflation.

The next stage of the strategy is for the B of E to talk down the currency which of course further increases inflation and also further impoverish us as a nation.

These actions are likely to continue for some years yet, with the end result that the purchasing power of the consumer will be significantly eroded.

At the end f this process we may have lower national debt in real terms but we will all be a lot poorer.

report this

Barry Payne

Feb 12, 2013 at 20:06

The banks lost 100's of billions, the UK government borrowed 100's of billions to bail them out, then they print new money to cover their own borrowing. Surely the money was lost by the banks, and QE is only putting that 'lost' money back into the economy? Isn't it?

report this

Jonathan

Feb 12, 2013 at 22:45

Barry Payne

Money doesn't get lost, someone else gets it. When you buy something someone else takes the money, so it's a zero sum game.

report this

Jon

Feb 13, 2013 at 08:55

Barry - the money the banks lost went into the economy and into the Treasury. Problem is that the then Government spent it all on the basis of "prosperity" when it was a false boom. So the money went on additional "jobs" and into the pockets of very many people. The real losers were the pension and savings funds which took the brunt of the losses as shareholders.The taxpayer made a profit as the cost of the bailout was far less than the additional tax receipts from the "boom".

report this

andrew aberdein

Apr 17, 2013 at 23:09

if QE is forcing up inflation here in the UK why is it not happening in the united sates

report this

leave a comment

Please sign in here or register here to comment. It is free to register and only takes a minute or two.

News sponsored by:

The Citywire guide to investment trusts

In association with Aberdeen Asset Management

Fund managers from Standard Life Investments quizzed on investment trusts


What can SLI bring to the table for those who want to put their money into investment trusts?

Today's articles

Tools from Citywire Money

From the Forums

+ Start a new discussion

Weekly email from The Lolly

Get simple, easy ways to make more from your money. Just enter your email address below

An error occured while subscribing your email. Please try again later.

Thank you for registering for your weekly newsletter from The Lolly.

Keep an eye out for us in your inbox, and please add noreply@emails.citywire.co.uk to your safe senders list so we don't get junked.

Read more...

FTSE brushes past 6,500 as Fed relief rally continues

by Gavin Lumsden on Dec 19, 2014 at 17:24

Sorry, this link is not
quite ready yet