New figures from the Office for National Statistics (ONS) have shown that the rate of inflation in the UK jumped sharply last month.
The Consumer Prices Index (CPI) rose from 2.2% in September to 2.7% on October, whilst the Retail Prices Index (RPI), which includes the cost of housing, rose from 2.6% to 3.2%.
Whilst the government described the figures as “disappointing” they perhaps offer an explanation as to why the Bank of England did not increase the size of the existing Quantitative Easing (QE) program at least week’s meeting of the Monetary Policy Committee (MPC).
The Bank of England is charged with keeping CPI at 2%, something which the graph to the right, shows has proved almost impossible over the past few years, with the Bank reluctant to use their main weapon, an increase to interest rates, for fear of harming the economy.
Why is inflation rising?
The main cause of the sudden increase in the rate of inflation is education costs, which rose by 19.1% on the same time last year, mainly due to the government increasing the cap on the cost of university fees to £9,000.
As expected after such a wet summer the cost of food, especially vegetables, rose significantly.
Looking to the future, many experts are predicting that inflation will continue to rise, mainly down to the increasing cost of energy
Smaller chocolate bars
Strangely, the effective cost of confectionary rose, after a number of manufacturers reduced the size of their products; this is treated by the ONS as a price rise as chocolate lovers are getting less for their money.
How do the figures affect you?
The most obvious affect will be on the disposable incomes of households, which will be reduced due to rising food prices. Although the increase in the cost of higher education, will probably not be felt immediately, as this is generally paid for through the system of student loans.
Household incomes will be further squeeze by wage inflation, which is currently running at around 2%, with prices clearly rising more quickly meaning less disposable income.
Savers will also be badly hit by the news that prices have started to rise again.
Savers, many of whom are retired and rely on the interest to supplement their pension income, have struggled over recent years to get a real, that’s to say above inflation, return on their savings accounts. As inflation started to fall during 2012 some hope emerged that the misery for savers might be over, however these hopes now appear to have been dashed. During the past few months the best savings interest rates have started to fall, mainly due to the government’s Funding for Lending Scheme, which provides a cheaper source of finance to banks and building societies, whilst it now seems that inflation is on the rise.
This perfect storm of falling interest rates and rising inflation is likely to cause more hardship for savers, especially those who have already retired and rely on the interest from savings accounts to support income which is often fixed and in itself at risk of being eroded by inflation.
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