Interest rate cuts unlikely as inflation rises

18 March 2008
Interest rate cuts could be out of the window after figures revealed inflation climbed to 2.5% in February.

This is up from 2.2% in January, and means inflation is now half a percentage point away from the government’s target of 2%.

The rising cost of gas and electricity bills is the main cause for the rise in inflation. However, the increased price of alcohol and cigarettes compared to last year was another force pushing inflation upwards.

Inflation would have been higher if the cost of fruit had not fallen from last year. Vegetable prices also rose by less than they did a year ago, helping to keep inflation from spiralling further upwards.

Members of the Bank of England’s Monetary Policy Committee, which is responsible for setting interest rates, have previously warned that a “steep” increase in inflation is expected in the short-term.

Despite the turmoil hitting the financial markets, if the MPC deems rising inflation too high a risk it is unlikely to cut rates when it next meets on 10 April.

Research by Alliance Trust show that inflation is hitting people aged over 65 the hardest.

People aged 75 and over are the worst hit, facing inflation of around 3.4%. Younger retired households, aged 65-74 years, also face an inflation rate much higher than the officially recorded rate of 2.5%.

According to Alliance Trust, people under the age of 30 only have a personal rate of inflation of 2.7%, although this is still higher than the official headline rate of inflation.

This is because this age group benefits from falling clothing and audio-visual product prices. However, they are still under budgetary pressure from higher fuel, education and rent costs.

Shona Dobbie, head of the Alliance Trust research centre, said: “Inflationary pressures remain strong for many basic goods that we all have to buy on a regular basis. The fact that we have to buy these goods regularly makes inflation feel much higher than the official level, but also leaves households with less money left over to spend on the more discretionary items, such as clothing and audio-visual goods, where prices continue to fall.

“Recent increases in both gas and electricity prices could push headline inflation even higher in the coming months.

"This is a problem for all age groups, but since the over 75s spend the highest proportion of their household budget on these goods, they could be hit the hardest.”

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