Inflation still rising

Financial News

Latest figures from the Office of National Statistics (ONS) show that inflation has risen again.

The Consumer Price Index (CPI), which excludes housing costs rose to 3.7%, a 17 month high. The Retail Price Index (RPI) which includes housing costs such as mortgage interest rose sharply to 5.3%, its highest level in 19 years.

The ONS believe that the rise is partially down to increases in fuel, clothing and food costs, the rise in VAT on tobacco and alcohol have also pushed inflation upwards.

Mervyn King, Governor of the Bank of England had to write to the new Chancellor, George Osborne to explain why inflation is above the 2% target. In his letter he states that inflation has risen since September but still believes that it will fall in time saying, “the change in VAT and higher petrol prices will continue to be reflected in the overall price level (CPI and RPI). But, unless they increase further, that should affect the twelve-month CPI measure of inflation for no longer than a year. Moreover, the continuing impact of the past depreciation of sterling is still pushing up on consumer prices, but likewise the effects on inflation can be expected to wane over time.”

He went on to say “The May projections also suggest that, absent further price level surprises, it is likely that inflation will fall back to target within a year.”

Only time will tell if Mervyn King’s prediction will come true, however in the meantime the rate of inflation will cause issues for many. Here at Investment Sense we have for a while now highlighted the problem that relatively high inflation and all time low interest rates cause to savers who are trying to get a real, above inflation, return on their savings. This was highlighted in our May newsletter; click here to see this article.

However, the latest rise in RPI may start to effect people receiving income from Defined Benefit or Final Salary Pension Schemes.  The income from these types of pension generally rises in line with RPI, however is often capped at 5%. RPI is now above this rate therefore for those people in schemes with the 5% cap the real value of their income.

Savers and those drawing their pension will hope that Mervyn King’s prediction is correct because if inflation continues to rise as it has done recently or stays at these levels for a significant period of time it will start to have a severe effect on people’s financial position.