UK Inflation Rises Sharply

Feeble global demand has been putting negative pressure on inflation for some years now. It has been helped by the crash in oil and gas prices which feed through into cheaper fuel, transport and energy costs. Weak demand means that producers need to keep prices low in order to sell their goods, but it also means that wage settlements are low (which seems to be the case irrespective of where one is in the economic cycle, for many people).

Central bankers are convinced that low, steady inflation is a good thing for an economy as it drives growth. If indeed that is the case, then Mark Carney, the Governor of the Bank of England, should be feeling happier. Inflation in the UK (measured by the Consumer Price Index) picked up from 0.6% in August to stand at 1% last month, making it the biggest monthly price hike seen since June 2014, according to data for the Office for National Statistics (ONS), and the highest UK inflation has been since November 2014.

Surprisingly, ONS stated that there is no evidence that the weaker pound (since the 23rd June referendum result) has yet fed through into higher prices. The increase is blamed on dearer hotel rooms, petrol (coming off its lows, but also since the cheaper price is falling out of the data) and clothing. Since Britain imports significant quantities of goods (notably food, clothing and fuel), eventually, the weakness of Sterling must feed through to prices. The reason this has yet to happen is due to delays in the supply chain between initial production of goods and their eventual sale. Ironically, the increased rates for hotel rooms has been blamed on increases in the numbers of foreign tourists visiting the UK because the weakness of the Pound makes it a cheaper destination to visit and for shopping!

For some UK families receiving social security benefits will be hurt by the higher inflation figure which is traditionally used to fix increases in benefits since government has frozen tax credits and some benefits until 2020. This may effect up to 11 million households; the Institute of Fiscal Studies estimates that an average inflation figure of 2.8% would cost the typical recipient family £360 a year in the coming years (those receiving more benefits would be harder hit). As the fall in Sterling is approaching 20% since the vote, that figure could be conservative.

Dr. Mike Campbell
Dr. Mike Campbell is a British scientist and freelance writer. Mike got his doctorate in Ghent, Belgium and has worked in Belgium, France, Monaco and Austria since leaving the UK. As a writer, he specialises in business, science, medicine and environmental subjects.