Soaring air fares boost inflation

by Ed Bowsher on 14 September 2010  |  7 comments
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Soaring prices for air travel and food have meant that inflation was unexpectedly high in August. This is depressing news for most of us.

Inflation stayed unexpectedly high in August at 3.1%. Economists had expected a slightly lower figure of exactly 3%. The main factors behind the surprise were rising food prices and soaring air fares. The cost of flights soared 16.1% between July and August, a record gain for this time of year.

Even more depressing, core inflation, which excludes the cost of food, tobacco, alcohol and energy prices, rose from 2.6% in July to 2.8%. Some economists believe that core inflation is the most useful measure of rising prices, so seeing it move in the wrong direction is bad news.

It’s worrying that the UK can’t seem to get inflation fully under control when several other countries are fretting more about the threat of deflation rather than inflation. The US is the best example of this – inflation is widely expected to fall from its current level of 1% to around 0.5% next year.

Yes, UK inflation may still fall significantly next year - in fact, it remains the most likely scenario - but I'm less confident about this than I was. Inflation's current stubborness increases the chance that inflation will stay above 3% in 2011. Pressure is going to mount on the Bank of England to raise the base rate soon;  as a result, the economy could be hit next year by a double whammy of higher interest rates and spending cuts. If that happens, it won’t be fun.

Of course, there’s one group that would benefit from a higher base rate – savers. However, even they should be nervous. The combination of a sluggish economy and above-target inflation wouldn’t be in the interests of most of them.

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