The Bank of England is independent of the UK government and is charged with managing inflation which has a target value of 2%. Economists believe that low, stable inflation is good for the economy of a country, although consumers and workers subject to low or zero salary increases may take issue with them.
Central banks use interest rates to control inflation and either retard or stimulate an economy; higher rates choke off inflation and can cool economic activity whereas “cheap money” is said both to be inflationary and stimulatory to the economy. The Bank of England cut rates to an historic low value of 0.25% in the immediate aftermath of the Brexit vote as one part of its strategy to bolster confidence and push economic growth following the unexpected outcome.
Figures released on Tuesday show that the UK’s inflation rate stands at 3%, as assessed by the Consumer Prices Index (CPI). The current rate of inflation is the highest seen in the UK since April 2012. The September inflation figure is used to fix increases in state pensions and a sister reading, the Retail Prices Index (RPI) will dictate an increase in rates that businesses pay. RPI came in at 3.9%.
The higher CPI reading, up from 2.9% in August, has been attributed to higher costs for food and transport and is a year-on-year figure. The data is compiled by the Office for National Statistics which commented that clothing prices had fallen since September last year, tempering the CPI rise somewhat.
Data should be released later today which is expected to reveal that the increase in wages has fallen back against inflation. Business bodies will hope that the Bank of England resists temptation to raise interest rates next month as they believe that the economy is relatively weak and will be adversely affected even by a small rise. Any rise in the BoE interest rate would be passed on by high street banks and mortgage companies, making the costs of mortgages, personal loans and overdrafts dearer.