By: Dr. Mike Campbell
Figures just released in the UK show that the Consumer Price Index (CPI) has risen by 0.4% above the January figure to stand at 4.4%. The news will undoubtedly fuel speculation that the Bank of England’s Monetary Policy Committee (MPC) will be forced to abandon its policy of holding interest rates at 0.5%. The belief that a rate rise may be imminent has helped to send the Pound to a two year high against the Dollar: GBP/USD 1.6388. Sterling also appreciated against the Euro by 0.6% to stand at 1.154.
The CPI figure has been at least one percent above its target level of 2% for each of the past 15 months. The MPC has had to balance the potential harm of a rate rise on the still relatively weak UK recovery against the impact of higher inflation which means that UK citizens find that their money doesn’t go as far. In the longer run, a high CPI number will lead to demands for larger pay increases to offset the declining spending power that UK workers are experiencing.
A Closer Look
The Retail Price Index (RPI) figure which includes interest from mortgage payments has risen to 5.5% for February. This is the highest value seen for the RPI in 20 years.
The CPI figure was worsened by higher costs for clothing and footwear, according to the Office for National Statistics, which rose by 3.6% as the January sales period ended. Higher costs for energy and transport are also feeding through as uncertainties caused by political instability in Africa and the Middle East push fuel prices to higher levels. Lastly, many retailers have ended promotions where they absorbed the cost of the 2.5% increase in VAT which was brought in at the start of the year.