How are UK Inflation Spikes Affecting the Public?
Last week reports indicated that UK inflation had reached its highest point in two-and-a-half years in December, after an unexpected rise in core prices pushed top levels upwards 1.6%. Here Finance Monthly benefits from an exclusive in-depth breakdown by Market Analyst Jonathan Watson at currencies.co.uk, who explains how recent spikes in inflation can have a dramatic effect on consumers, business and the rest of the public.
Inflation, the rate at which prices increase is in itself not a bad thing. However, in certain economic circumstances it can cause problems, particularly for the public at large. The UK as a net importer buys more from overseas than it sells. That means that when the Pound is weak or has a big fall as has happened since the Referendum vote, the cost of importing goods goes up. With the Pound expected to remain weak Inflation is expected to push higher in 2017. The good news is that wage rises are increasing as well, the bad news is that it might not be enough to keep pace with the headline rates of inflation in the wider economy meaning the public will overall have less money in their back pocket.
Inflation is the rate at which prices rise. In an economy prices are continually changing according to various economic, political and social reasons. A degree of Inflation is acceptable and welcome in an economy since the opposite ‘deflation’, where prices fall is most unwelcome as it can severely hamper an economy as consumers and business delay purchases, anticipating their purchase will be less costly in the future.
In the UK Inflation is targeted at 2% and the main measure used is the CPI or Consumer Price Index. This looks at a continuous ‘basket of goods’ and assesses their changes in price over time. The latest Inflation report showed 1.6% which is the highest reading since July 2014. Throughout history there have been some big swings in Inflation, in the 70’s it was over 25%.
How does it affect the public?
Rising Inflation pushes up prices so the main effect on the public is to make goods and services more expensive for consumers and business. Rising prices therefore puts more of a squeeze on consumers as they have less money to spend. It puts pressure on businesses because they have to make a decision on either raising prices to cover their increased costs or reducing their profits. This negative impact on business impacts the public with either higher prices to the consumer or the prospect of workers being laid off as the business has to cut costs. Overall spending in the economy therefore declines as consumers and business have less money to spend as a result of the higher prices.
For example, fuel prices have been rising since oil is priced in US Dollars. The price of oil has risen globally (in itself an inflation boosting factor) but the fact the price of US Dollars has increased over
20% since the Referendum result further exacerbates this issue. Rising fuel prices will be an unescapable cost to the some 30 million cars on conventional roads. Businesses reliant on road haulage will see increased costs. Much of the UK’s food in supermarkets is delivered by road and therefore affected by fuel costs. Rising fuel inflation is a classic example of a negative effect for the public. It will mean the individual consumer will have to shell out more to fill their tank to drive to and from work and to take the kids to school. And when they finish work and stop to pick up their food to eat, there is a good chance Inflation will be making their weekly shop more expensive too.
There have been numerous high profile cases of rising food prices themselves. Back in October Tesco and Unilever fell out famously over the price of Marmite amongst others. We were told this would be the beginning of many such cases and almost weekly we are hearing fresh news of a household brand putting up prices. This weekend reports Nestle put up prices of coffee 14% will not be the last in this ongoing saga. One way or another rising prices feed into the wider economy. According to the Sunday Times Sainsbury’s raised the price of Nestle coffee by 14% this weekend whilst raising another Nestle product Pure Life Spring water 22%.
But it is not just necessities such as fuel and water that has risen. Luxury goods as such have also risen as international brands not only respond to the fact a weaker Pound means less value in their own currency, but also to try and keep prices harmonised globally. It was reported that Brexit saw a surge in luxury product sale in London as wealthy foreign shoppers arrived to take advantage of the cheaper products. Examples include Rolex, Burberry and other luxury items. Many of these brands have increased the price of their goods. Rolex last year raised prices by 10%, Apple increased the price of all their products last year too. And more recently raised the price of apps in their app store.
What does the future hold?
The key concern is whether Inflation will rise faster than wages. So far wage increases are running around 2.8% whilst CPI is as reported 1.6%. The worry is that wage inflation will not be able to match the price of CPI throughout 2017. The National Institute of Economic and Social Research (NIESR) have predicted inflation may rise to 4% this year.
This will mean consumers will have less money in their pocket which exacerbates the problems outlines above of less money in the economy. Retail Sales in December were much lower indicating the higher prices in the shops are starting to bite. Many business importing raw materials and products from outside of the UK will have hedged on their currency some 12-18 months ago. They will therefore have not yet been forced to raise prices as they are not buying at the new lower exchange rate. With the Pound having dropped some 10-15% since the Referendum eventually the UK as a net importer will have to pay more for the goods and services it is buying from overseas. 2017 will be the year this starts to become much more apparent.
One tool to combat Inflation is to raise interest rates but this can have its own implications. For example as interest rates rise it will help savers but put up repayments for borrowers. Credit card debt has been rising to almost pre-crisis levels prompting the Bank of England to warn it is closely monitoring this situation. If Inflation rises dramatically an interest rate hike is very likely but whilst this will help cool the inflation rise (and help Sterling strengthen) the potential negative factors on borrowers is probably not worth the benefit to savers.
All in all, some Inflation is good and welcome in an economy, but if it starts to bite too much into people’s back pockets and in turn hurts business and the wider economy this is not good. Rising Inflation can increase Unemployment, lower GDP and dent both business and consumer confidence. With the weak Pound being a key contributor to rising Inflation and the Pound likely to remain low in 2017 and beyond, rising Inflation is an issue that is going to continue to affect the public until it is understand what Brexit actually entails.