Inflation rises again

Posted on November 17th, 2010 | Categories - Financial News

Inflation is steadily increasing.

The rate of inflation is moving upwards.

The latest inflation figures show than the Consumer Prices Index (CPI) rose to 3.2% in October.

The rise is unexpected as experts had predicted inflation would remain static at 3.1%.

According to the Office for National Statistics (ONS), the rise was due to higher fuel prices, although the rise in food prices showed a welcome slow down.

Meanwhile, the Retail Prices Index (RPI), which contains a larger share of housing costs, fell slightly to 4.5%, down from 4.6% a month earlier.

The Bank of England’s target for CPI is 2% and the Governor, Eddie George, has to write to George Osbourne, the Chancellor of the Exchequer, to explain the breach.

In his letter following the latest figures, Mr George said: “The current elevated rate of inflation largely reflects a number of temporary influences”.

He went on to say, “CPI inflation is expected to remain above target, and at a somewhat higher level than expected three months ago, for a period of a year or so”.

Although Mr George believes that in the longer term inflation will fall, pointing to the view held by a number of experts that inflation will fall back to 2% by 2012, he conceded that it may rise in the short term.

This illustrates the dilemma faced by the Monetary Policy Committee (MPC) – on one hand they believe inflation will fall back to the target level, however each month that no downward movement is seen, pressure is added on the MPC to take action and increase interest rates.

Indeed the MPC is split, with the minutes of the last meeting in early November, showing that seven of the members voted for no change in interest rates, with one, Andrew Sentance, voting for a 0.25% rise to 0.75%. Furthermore one member, Adam Posen, voted for a further round of quantitative easing (QE), although he was the only one to do so.

“The Bank of England will be far from happy with the October consumer price inflation data”, said Howard Archer, analyst at IHS Global Insight.

“But it is essentially in line with the projections contained in the bank’s November Quarterly Inflation Report and is unlikely to prompt a near-term interest rate hike. However, the data is likely to reinforce the Bank of England’s reluctance to re-engage in Quantitative Easing for now at least”.

The news that inflation is likely to rise before it falls and that interest rates are unlikely to rise in the short term will not be welcomed by savers who are seeing the buying power of their savings eroded. At current rates Basic rate taxpayers would have to tie their savings up for three years to get an after tax return that beats the latest CPI figures. There are no accounts that provide an interest rate to higher rate tax payers that will beat inflation.

When it comes to Cash ISAs, again to get an inflation beating return, savings have to be tied up for at least two years. With interest rates showing no sign of increasing, savers will continue to see the value of their money eroded by inflation.