- Depreciation in Sterling makes imports more expensive. About 40% of goods are imported, when the pound devalues as it did in 2008/09, it makes imports more expensive.
- It is a reflection that prices fell in December 2008 by 0.4%. By contrast last month they rose by 0.3%.
- Oil prices rising relative to 2008
Factors which aren't causing Inflation?
- Quantitative Easing. You might expect that if you create £200bn of electronic money this increase in money supply should cause inflation. However, money supply growth is still 'undesirably low
- Wage growth is very restrained due to the unemployment and impact of recession. Wage growth was just 0.7% in 2009.
The spike in inflation will most likely prove temporary, but, the bad news in the short term is declining real incomes - Many people will be seeing prices rise faster than wages - hardly something to boost the economic recovery to say nothing of the political cost to Labour.
It is important to remember that inflationary spikes can be misleading to underlying state of economy. For example, the inflation spike in early 2008, just before the economy plunged into deep recession.