Consumer price inflation rose more than expected in April, reaching 4.5% - up from 4.0% in March - according to figures released earlier today by the ONS.
Consumer price inflation rose more than expected in April, reaching 4.5% – up from 4.0% in March – according to figures released earlier today by the Office for National Statistics.
The jump was due mainly to higher air and sea fares, reflecting the timing of Easter this year, and to higher tobacco and alcohol prices following increases in duties announced in the March budget.
Meanwhile, retail price inflation fell from 5.3% to 5.2%. Air and sea fares have a significantly lower weight in the calculation of retail price inflation than in consumer price inflation. In addition, retail price inflation includes council tax payments and housing depreciation, which had a downward impact on inflation, whereas council tax and depreciation are excluded from consumer price inflation.
One worry is that consumer price inflation excluding energy, food, alcohol and tobacco – which some economists believe is the best representation of underlying inflation pressure in the economy – rose to 3.7% in April, from 3.2% in March. It is now at its highest level since records began in January 1997. This will add weight to the fears of those members of the Monetary Policy Committee who are voting for an immediate increase in interest rates in the belief that there is a danger of higher inflation becoming permanently locked into the UK economy.
On the other hand, unless wage inflation picks up (and there is little to suggest that it will), higher price inflation adds to the squeeze on households’ spending power. The Bank of England thinks inflation will reach 5% by the autumn. Already, we have seen the effect of this squeeze on the retail sector – sales volumes have not increased for the last eight months – and on the broader economy, since it explains, in part, the stagnation of real GDP over the last two quarters. An increase in interest rates, and the higher mortgage rates that would follow, would add to this squeeze and might even risk tipping the economy back into recession.
For this reason, the majority on the Monetary Policy Committee, who oppose higher interest rates, are right. The pressure for an increase in interest rates will mount if inflation does rise to 5% in coming months. It should be firmly resisted.
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