UK Inflation Rises

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The rate of inflation in the U.K.increased again in July, forcing Bank of England Governor Mervyn King to write a letter to the Treasury explaining why inflation remains so far above the central bank’s 2% target.

He said higher energy bills would force Consumer Price Index (CPI) inflation to “around 5%” this autumn but held out the prospect of the cost of living falling next year.

In his latest quarterly letter to George Osborne explaining why inflation remained more than one percentage point above the government’s 2% target, King blamed dearer imports, higher VAT and rising global commodity prices.

The Office for National Statistics (ONS) said last month’s pickup in inflation had been due in part to higher bank charges and to smaller falls in clothing and footwear and household goods prices than in July 2010. Many high street retailers brought forward their summer sales to June this year in an attempt to boost demand, resulting in fewer bargains last month.

The rate of inflation as measured by the CPI rose to 4.4% from 4.2% in June, according to figures from the ONS.

The Retail Prices Index (RPI) measure, which includes household costs such as mortgage interest and council tax, was unchanged at 5%.

The ONS said the main contributors to inflation came from financial services, clothing and footwear, furniture, household equipment and housing rent.

In its breakdown of the grocery market, Kantar Worldpanel said sales values were 3.8% higher in the 12 weeks to 7 August than they had been during the same period of 2010, but food inflation was 5.2% during the same period.

The inflation figures showed how the prices of individual staple items continue to soar. Prices for food and non-alcoholic beverages rose by 6.2% over the past 12 months. Bread and cereals prices rose 9.7%, meat prices rose 6.6%, and chocolate and confectionary rose 7.5%. Household energy bills rose 4.6%, and transport costs rose 7.8%.

Even the more discretionary spending has been hit, with alcohol and tobacco rising by 10.3% and clothes and footwear by 3.1% both the largest increases since records began in 1997.

The increase in inflation has also hit savers hard. To beat inflation, a basic rate taxpayer at 20% needs to find a savingsaccount paying 5.50% per annum, according to Moneyfacts, while a higher rate taxpayer at 40% needs to find an account paying at least 7.33%.

Spending power hit

Britain’s hard-pressed consumers are trading down to cheaper brands and making fewer visits to the supermarket as higherinflationerodes their spending power.

With thelooming increase in the cost of living over the coming months, the market research company Kantar Worldpanel said shoppers were buying less and migrating to low-cost retailers such as Aldi and Lidl.

One of the UK’s “big four” supermarket chains, Asda, said the number of visits by shoppers had fallen by 1.2% in the three months to June, adding that customers were economising on petrol costs.

Meanwhile, the energy company Npower became the latest utility company to announce price increases well in excess of the current inflation rate when it said tariffs for its 3.3 million customers would be going up on 1 October.

Average tariffs for gas will increase by 15.7% and electricity by 7.2% from 1 October, Npower said, meaning the average monthly direct debit dual-fuel customer will see bills increase by 12.2% an additional 134 a year.

The fourth largest provider in the UK said the increases were necessary because of rising wholesale prices on the global market and the need to invest in Britain’s future energy supplies.

‘Challenges in sustainability’

Andrew Goodwin, senior economic adviser to the Ernst & Young Item Club, said the modest pickup was “really the calm before the storm”. He added: “We’re likely to see inflation rise significantly over the next couple of months as the large energy price hikes begin to kick in.”

Kerry McCarthy, the shadow Treasury minister, said: “It is very worrying that inflation is more than double the government’s target rate and rising. Rising world commodity prices are partly to blame. But things have been made much worse inBritainby George Osborne’s big rise in VAT, which is due to his decision last year to cut the deficit too far and too fast.”

In its breakdown of the grocery market, Kantar Worldpanel said sales values were 3.8% higher in the 12 weeks to 7 August than they had been during the same period of 2010, but food inflation was 5.2% during the same period.

“It is evident that shoppers are trying to manage their ‘personal’ inflation by trading down. This can be done by seeking out lower priced outlets and cheaper alternative products,” Kantar said, noting that Aldi had posted annual sales growth of 24.4% and achieved its best-ever market share of 3.6%. “It’s unsurprising that the discounters have pushed further ahead this month.”

In his letter King said turbulence on global stock markets and the debt crisis in the eurozone were of “particular concern”.

“Several member countries face substantial challenges in ensuring the sustainability of their fiscal positions and preserving the stability of their banking systems. There is a risk that this could lead to further severe stress and dislocation in financial markets and, were this risk to crystallise, it would have a significant impact on the UK economy.”

Domino effect?

Geopolitical troubles and natural disasters teamed up to roil global stock markets in the first quarter of 2011, putting a number of 2010’s star performers on a defensive footing to start the year.

The turbulence began in late January, as popular protests struck several countries in the oil-producing Middle East and North Africa, sending chills through global energy markets and tripping up a global stock rally.

Early in January, a steep market drop on the Dhaka Stock Exchange triggered a riot involving thousands of investors, forcing the Bangladesh stock market to suspend trading as security officials hit protesters with batons.

In mid-March, the worst earthquake ever measured in Japanand the resulting tsunami and nuclear crisisleft investors scrambling for safety, fearing the potential global economic effects from one of the world’s biggest economies.

As the quarter came to an end, the European sovereign crisis reared its head again, threatening to fell Portugal after a year marked by bailouts in Greece and Ireland.

All this followed by the current U.S. debt crisis, and the increase in inflation levels in the U.K.

It sure is a waiting game now, whether there will be the expected rise in the CPI or is the saving spree just temporary.

Sources: Guardian, WSJ, investortoday

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