UK inflation accelerates to 3.5%

The UK inflation rate rose from 2.9% in December to 3.5% in January - the fastest annual pace for 14 months, official figures have shown.

Consumer Prices Index (CPI) inflation was driven up by VAT returning to 17.5% and higher petrol prices.

Retail Prices Index (RPI) inflation which includes housing costs, rose up to 3.7% in January, up from 2.4%.

Bank of England governor Mervyn King has had to write a letter of explanation to the chancellor. A letter from the bank's governor is required if inflation is more than one percentage point above or below the government's 2% target. In it, the governor said the inflation rise was "temporary".

Mr Darling responded, saying the inflation outlook was "subject to some uncertainty" as the world emerges from the "deepest downturn in modern times".

Food factor

The CPI inflation rate is the measure targeted by the Bank of England's interest-rate setters, while the RPI rate is often used as a benchmark in wage negotiations.

And January's VAT rise was the biggest factor raising the CPI to 3.5%, according to the Office for National Statistics.

The government had reduced VAT to 15% for the previous 13 months, to try to boost consumer spending.

Higher fuel and transport costs also pushed the CPI up, and last month's cold weather increased some vegetable prices, with the cost of cauliflowers rising by the highest amount since 1996.

The Bank of England had warned inflation could rise to 3.5% this year but predicts it will fall back below the 2% target later in 2010 as the economy remains relatively weak while continuing to recover from the recession.

Price fears overdone?

Most economists expect the Bank to hold off from raising interest rates to try to bring inflation back down sooner.

UK interest rates have been at the record low level of 0.5% for 11 consecutive months, as the Bank seeks to aid the economic recovery.

However, earlier this month the Bank decided against further quantitative easing (QE), the policy designed to stimulate growth in the UK economy.

Under QE, the Bank has pumped £200bn of new money into the economy by buying assets such as government bonds, as a way to boost lending by commercial banks.

A number of analysts said concerns about the current high rate of inflation was likely a factor in the Bank choosing not to extend QE.

However, former monetary policy committee member Professor David Blanchflower told the BBC that a spell of higher inflation would benefit the UK economy, suggesting that 4% would be a "pretty good starting point".

"You would actually end up inflating some of the debt away, but also if we get into a position where house prices were to fall further we are going to have a large number of people in negative equity, and if you have a few years of inflation that actually will deal with that problem."

Higher inflation would help to keep interest rates low, he added.

However, the combination of higher prices and lower rates is seen as punishing those who have put money aside, as the value of their savings is eroded while the returns they make on them declines.

Posted at 08:45PM Feb 16, 2010 by Kelly Board in The Economy  |  Comments[0]

Credit Card Interest Rates Rising

New research conducted by Moneyfacts has revealed that credit card interest rates in the UK have hit a twelve year high.

The main bank rate has remained at 0.5%, hover that has not stopped the rise and now the average interest rate paid on a credit card hit 18.8% in February.  According to the research, this has been due to growing fears amongst banks and other lending companies that buyers are more likely than ever to default on repayments.

There are also Bank of England figures that support this with default rates hitting a three year high.

Write-Offs

Further figures from the Bank of England have also revealed that there has been a massive increase in the amount of bad debt write offs that banks have been forced into on their credit cards.

Borrower defaults and write offs are the main causes in the growing difference between the Bank of England’s Bank rate and the rate banks are charging their customers. The Bank rate has been stood at 0.5% for almost a year now.

The third quarter of 2009 saw a 100% rise in the amount of money written off as banks acknowledge that they money could not have been recuperated from defaulting borrowers.  Quarters one and two saw around £800million written off compared to around £1.6bn in quarter three. The total of these three quarters was equal to the whole of 2008.

Official figures showed that the average interest rate charged in credit cards in January was 16.4%, but the figure is expected to rise this month to the aforementioned 18.8%.

Posted at 11:34AM Feb 16, 2010 by Marc Stenton in The Economy  |  Comments[0]