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Inflation picks up

Ed Bowsher
by Lovemoney Staff Ed Bowsher on 20 April 2010  |  Comments 3 comments

Inflation rose by more than expected in March. That means the Bank of England may raise the base rate in the summer.

Inflation is picking up – faster than many people predicted. The government’s favourite measure of rising prices – the Consumer Prices Index (CPI) – rose by 3.4% for the year to March. That’s significantly higher than February’s figure of 3%. What’s more, economists had only expected a 3.1% rise in March.

Why has this happened?

One big reason is that the value of the pound has fallen. A falling pound makes our exports cheaper overseas and boosts industry here, but it also makes imports more expensive. Commodity prices have also been rising.

And let’s not forget, we’ve had a very low base rate for more than a year now and we also had the Bank of England’s money-printing programme, Quantiative Easing (QE). All other things being equal, you’d normally expect a low base rate and QE to lead to higher inflation.

What does this mean for interest rates?

You can’t be certain, but a rise in the base rate this summer looks more likely now than it did yesterday. That will be good news for savers, less good for borrowers.

Am I worried?

In previous posts, I said that I didn’t expect inflation to take off this year.  But inflation is now rising, and March’s number is higher than I expected. Am I going to end up with egg on my face?

Well, if we get a hung parliament there’s a good chance that the pound will fall some more. And that will push up inflation.

That said, I still don’t think that inflation is set to soar. The economy is still weak, there’s spare capacity in the economy, and wages aren’t rising fast. Yes, the CPI could maybe go over 4%. Maybe. And yes, the Bank of England may well start raising the base rate in the summer.

But when you look at the history of the last 40 years, 4 or 5% is a pretty low inflation rate. And, anyway, there's still a good chance it will start falling soon. I stand by my view that inflation is not our biggest economic problem.

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Comments (3)

  • agohiluk
    Love rating 0
    agohiluk said

    With inflaion rising, this will also mean that pensions and other earnings which are linked to RPI will also be going up. So hopefully, pensioners and thse on low earnings will benefit first from the incease in interest rates, secondly from the increase in pensions, and thirdly if the lib-dem are elected from the increase in the ax thresh hold to 10,000 pounds for all taxpayers. That should put a smile to everyone on lw incomes!!

    Report on 21 April 2010  |  Love thisLove  0 loves
  • Ed Bowsher
    Love rating 76
    Ed Bowsher said

    "An inflation rate of 4 to 5% is not low when you take into account the appalling rates offered to savers coupled with the fact that many workers now face perhaps years of low pay increases as well as tax increases to pay for the bankers partying."

    Yes, it's true that savings interest rates are currently low when compared to inflation. That's a big problem for some people although i suspect that picture may change over the next year. I expect long-term gilt rates to rise and that will lead to higher rates on savings accounts and higher mortgage rates.

    And yes, you're right, we're going to have tax increases and pay won't probably go up by much. But that's really a reflection of the fact that the economic outlook is gloomy. The outlook is gloomy and that's why I don't think inflation is the biggest problem we face. The biggest problem is that we probably face years of sluggish growth and a government that is struggling to get its finances in order.

    Ed

    Report on 21 April 2010  |  Love thisLove  0 loves

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