The rise in the annual inflation rate to 1% last month is just the start. The cost of living in Britain is certain to increase noticeably over the next 12 months and likely to peak at about 3%, perhaps even a bit higher.
A bit of perspective is needed. By Britain’s recent standards, inflation is still low. Harold Wilson could only dream of 1% inflation when prices were shooting up at an annual rate of almost 26% in 1975. Despite her best efforts, Margaret Thatcher never managed to drive inflation down to its current level.
This is a different age. Globalisation, de-unionisation and weak growth have led to the death of inflation. For the past two or three years, the big fear for central banks has been deflation rather than inflation.
Britain no longer has that problem. The sharp fall in the value of the pound since the referendum on 23 June has banished any fear of deflation for several years to come, because anything that is imported – from French wine to Apple iPhones – costs more.
The upward movement in September from 0.6% in the year to August did not have much to do with the slide in the pound’s value, but make no mistake, the fall in sterling will eventually feed through into higher prices in the shops and at petrol stations.
Two factors explain the inflation increase. The first is that some prices are going up. Clothing was dearer, motorists noticed that petrol and diesel were a bit more expensive. Hotel bills were also higher, which is mainly explained by the above inflation increase in the minimum wage in April. The higher salary costs that resulted from the introduction of the “national living wage” are being passed on to customers.
The second reason for the upward movement is that prices were falling in September 2015, due to tumbling global energy costs. That has since ceased to flatter the annual inflation rate.
UK’s cost of living to increase noticeably over next 12 months, peak over 3%
October 19, 2016 by Leave a Comment