High prices here to stay
Households shouldn’t expect any let up in high prices, with inflation continuing to rocket upwards for some time.
That’s the warning made by Mervyn King, governor of the Bank of England, to MPs. During a Treasury Select Committee, King said he expects inflation to remain at least 100 basis points above its 2% target next week when the August figure is made public.
"In the UK we face a difficult - but temporary - period during which inflation will remain high for a while and output growth is, at best, weak," a grim King told MPs. "[But] we will come through and resume a path of normal economic growth with inflation close to target."
The official measure of inflation – the Consumer Price Index – is due to be published on Tuesday 16 September. Last month, it was revealed that inflation had hit 4.4% - more than double its target.
Despite King’s warning that “it will be a great surprise” if inflation isn’t above 2% next week, there are signs that inflation is easing.
Official data shows the cost of products leaving factories fell in August – suggesting that inflation at factory-level could have peaked.
Nur Ata, an economist at the Centre for Economic Business Research, says if inflationary pressures at the factory gate have reached their peak, then this should start to feed through to retail prices in the coming months.
However, consumers’ experience of inflation shows higher prices are hitting them where it hurts.
A Bank of England inflation survey found people’s personal rate of inflation is, on average, at 5.4% - a full percentage point above its actual level. And the median expectations of where inflation will be over the coming year show little optimism, with people expecting it to remain around the 4.4% mark.
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).