Brace Yourself For 8% Inflation

(sumber: Readers Digest)

The cost of living just keeps rising and rising, and brace yourselves, because there is plenty more to come. Inflation rose to 3.7% in December, according to the consumer prices index (CPI), up from 3.3% in November. That’s the biggest monthly leap on record.

But it’s even worse than that. If you measure inflation by the retail price index (RPI), it actually stands at 4.8%. The RPI figure includes housing costs, which makes it a more accurate measurement for many people.

The next set of figures could make even more dismal reading. They will reflect January’s VAT increase to 20%, the hike in fuel duty, and oil prices at nearly $100 a barrel. Most people expect CPI to top 4% next month, and stay there for the rest of the year.

That means RPI is likely to top 5%.

Rising inflation is bad news for pretty much everybody, but the elderly will be hurting most. They spend more of their money on essentials such as food and heating, where bills are rising fastest. According to one measurement, the over-65s experience an extra 3.3% inflation above RPI than the rest of us – costing them £700 a year. That puts their personal inflation rate at a dreadful 8%.

Savers are also hurting from soaring inflation, especially if they pay tax. A basic rate taxpayer needs to earn 4.63% gross on their savings just to keep pace with inflation, or 6.17% if they are a top-rate taxpayer.

You simply can’t get that kind of return on cash. The average savings account pays a meagre 0.19%. If you had £10,000 in a savings account paying 0.19%, inflation will have cost you a crunching £331 last year. It’s this double whammy of high inflation and low base rates that really does the damage to savers.

The Bank of England claims current inflation rates are just a blip, and CPI will return to its target of 2% next year. It argues, and with some justification, that it urgently needs to keep base rates at 0.5% to help the economy recover. Hiking-base rates now would put pressure on cash-strapped borrowers and businesses, and could even plunge us all back into recession.

The problem is, it has called inflation wrong for the last couple of years, regularly claiming it would be much lower. Even The Met Office would be embarrassed if it got its forecasts so consistently wrong (well, maybe).

January’s figures are likely to show CPI above 4%, and it could stay there for the rest of the year. The elderly and savers will continue to struggle, as will working families, because pay rises won’t keep pace.

The problem is that higher interest rates are the only medicine the Bank of England has at its disposal to treat rising inflation. So we can expect rates to increase at some point this year, and possibly more than once.

That will be good news for savers, and bad news for hard-up homeowners on variable rate mortgages. My big worry is that rising base rates will cure inflation by killing the economy.

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