Households feel the pinch as personal inflation soars
Households in the UK are struggling with an average personal inflation of nearly 5%, according to research from the Bank of England.
Despite the official measure of inflation – the Consumer Price Index – currently at 3%, people across the UK say the rate of inflation actually feels much higher at 4.9% as price hikes start to bite.
The central bank, which measures personal inflation on a quarterly basis, says people are feeling the pinch more today than they were back in February, when households put inflation at about 3.9%.
There is also an expectation among consumers that the official rate of inflation will rise throughout the rest of 2008, hitting a high of 4.3%. Back in February, people taking part in the research thought inflation would only get to 3.3% this year.
So far in 2008, households have had to cope with the rising cost of fuel, food and household utility and council tax bills. The cost of credit, from mortgages to loans to credit cards, has also been rising for many borrowers, putting extra pressure on their purse strings.
The Official of National Statistics will reveal the current level of inflation next Tuesday 17 June. Last month it reported that CPI had crept to 3%, 100 basis points about the government’s target.
The Bank of England’s Monetary Policy Committee, which sets interest rates, has repeatedly urged concern about rising inflation, hinting that this effectively rules out any interest rates cut in the months ahead. There are also fears it might increase interest rates in order to slow inflation.
The research also shows that around 48% of people questioned expect interest rates to rise over the next 12 months, while just 17% expect them to fall.
Despite this negative expectation, only 8% want to see interest rates increase while 45% want to see them reduce further. However, 52% appear to support the Bank of England’s policy of basing its monetary decisions around the need to keep a lid on inflation – even if this means increasing rates.
Bruce Fair, managing director of price comparison site Kelkoo, agrees that personal inflation is now around the 5% mark as a result of essentials such as travel, food and fuel getting more expensive. But he adds: "Although essential spending it pushing up personal inflation, our research shows that price tags on home appliances such as washing machines - which many households consider essential - are actually going down.
"As people are hit by rising costs they are increasingly being more savvy about how they shop, by using the internet and making sure they compare prices before buying."
Monetary Policy Committee
A committee designated by the Bank of England to regulate interest rates for the UK. The MPC attempts to keep the economy stable, and maintain the inflation target set by the government and aims to set rates with a view to keeping inflation at a certain level, and avoiding deflation. The MPC meets on the first Thursday of each month and discusses a variety of economics issues and constitutes nine members: the governor, the two deputy governors, the Bank’s chief economist, the executive director for markets and four external members appointed directly by the Chancellor.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
The Consumer Price Index is the official measure of inflation adopted by the government to set its target. When commentators refer to changes in inflation, they’re actually referring to the CPI. In the June 2010 Budget, Chancellor announced the government’s intention to also use the CPI for the price indexation of benefits, tax credits and public sector pensions from April 2011. (See also Retail Prices Index).