Thursday, 21 January 2010

Inflation: The Seismograph Ticks Louder

I've held off blogging about the 2.9 percent inflation rate in order to view all of the comments.

First off, the Bank of England (who remember are teasked with keeping the inflation rate a 2 percent) said it couldn't keep inflation at 2 percent because the factors at work were out of its control. So, just run that by me again: the institution supposedly given the task of controlling the UK economy doesn't actually have any control. Nice. In fact, what it really has is influence. It can only influence the rate of inflation by indirect means, such as raising the borrowing rate, or issuing more currency. But what happens when events run beyond the scale of those influencing mechanisms as I believe they will this year? We ride the inflation rollercoaster, that what.

So, with the current mechanisms, the Bank of England doesn't control the inflation rate: are you starting to feel uneasy? You should do.

There's a good chance gas prices will rise after this severe winter, pushing inflation up more. You may not have noticed, but prices on some high-end "luxury" goods such as TVs and Blu-Ray players crept up over December (before the VAT rise). They'll continue to rise as more expensive imports (thanks to the devaluation of the pound) filter through. With the increase in VAT on top, you should see noticable change in those prices. Sadly, the same can be said of food, thanks to our tough winter, I'm sure we'll be importing proportionally more food this year, so expect prices to lift there too.

Notealso that the figure is based on comparing last November with this November. So even with a low VAT rate, there was a 2.9% increase. When the VAT rate goes back up to 17.5% it'll be interesting to see what the rate will be, comparing January to January. Quite high I reckon.

Which brings us back to those mechanisms of influence: its a certainty that interest rates from the BoE will rise sharply, increasing payments for those that have been enjoying historically low mortgage rates. So if you're selling a house, or thinking of selling, you have a tight window of opportunity before rates rise and buyers start to disappear. Better to stay put I think, unless you're downsizing.

Ready for that double-dip everyone?

No comments:

Post a Comment

Note: only a member of this blog may post a comment.