Figures released today show that both measures of inflation rose last month.
The Consumer Prices Index (CPI) rose from 4.4% in July to 4.5% in August, RPI (Retail Prices Index) which includes the cost of housing also increased from 5% to 5.2%.
The Office for National Statistics (ONS) said that footwear and clothing were the main contributors to the increase, although increased heating and petrol costs were also to blame.
These increases were partially offset by the cost of transport rising more slowly than at the same time last year.
Inflation Target
The Bank of England’s Monetary Policy Committee (MPC) have a target of keeping CPI at 2%, and despite inflation being well above this target the Bank still believe inflation will fall back towards this target during the next two years.
The Bank believes that current levels of inflation are due to the VAT increase at the start of the year and a rise in global energy prices.
Chris Williamson, chief economist at Markit agrees: “The rate is likely to move higher in coming months as utility bills continue to increase, putting further pressure on already-strained household budgets.”
He continued, “However, inflation should start to fall by the end of the year, and drop significantly next year as those factors which have driven the rate up this year, such as January’s hike in VAT from 17.5% to 20%, high oil and food prices and the depreciation of sterling all move into reverse.”
Jonathan Loynes at Capital Economics echoed these thoughts saying, “August’s consumer prices figures brought further hope that the peak in inflation is close.
“We still expect inflation to be well below its 2% target at the end of next year.”
Interest rates
Many experts believe that inflation will continue to rise and disagree with the Bank’s assessment that current inflationary pressures are temporary.
Interest rates have traditionally be used to help curb inflation, however the MPC seem to be reluctant to increase rates at the current time and are seemingly more concerned about the damage an interest rate rise would have on the fragile economy.
However, if inflation remains above target or rises still further the MPC may be forced to increase rates. This will come as a relief for savers who are finding it almost impossible to get a real return on their savings and received a further blow last week when NS&I withdrew their Index Linked certificates.
