Inflation rises to 3.3%: what does it mean for you?
The consumer prices index – the official measure of inflation - rose to 3.3% from 3.2% in the month of November, official figures from the Office for National Statistics (ONS) show - well above the Bank of England's 2% target.
This follows a record 1.6% price hike for food and non-alcoholic drinks, with the price of bread, cereals and meat rising 1.9% between October and November. Food prices will rocket thanks to an increase in the price of flour, breakfast cereals and poultry.
Clothing and footwear prices also rose by 2% in the month, with the biggest price hikes coming from men's outerwear clothing. It coincides with the highest cotton prices in 15 years, which will increase the price of clothing.
Filling your car up at the station will also become more expensive. Crude oil prices have risen from $85 to $90 a barrel recently, which has in effect pushed the price of petrol up by 1.8p a litre.
Meanwhile, the retail prices index, which includes mortgage interest payments, is also up to 4.7% in November from 4.5% the month before.
Paul Hunt, managing director at Phoebus Software says: "With the VAT rise now only a few weeks away, the gains made by consumers through lower mortgage rates are at risk of becoming offset by rising costs.
"The Monetary Policy Committee (MPC) must strike a very careful balance between restricting consumer demand now – risking a sweeping loss of consumer confidence ahead of the public sector cuts – and the possibility that spiralling prices will necessitate a very strong monetary response next year."
He adds: "The current level of inflation means that the MPC's next decisions are critical to the UK's economic future in 2011."
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
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).