Tuesday, October 14, 2008

Inflation Presents Unwelcome Spike for Pensioners

Amidst all the talk of impending recession and possible bank collapse, an inflation rate above the government's target seems of minor significance. Yet, the news that CPI inflation increased from 4.7% to 5.2% will offer no encouragement to the MPC and government.
  • The main cause of the inflation is rising gas and electricity prices. Gas prices rose nearly 50% from 12 months ago.
  • It is bad news for pensioners who spend a large percentage of their income on heating. It is also bad news for those who rely on savings for income.
  • With interest rates cut to 4.5%. It means real interest rates are negative (5.2% - 4.5%) See: Bank of England Website
  • This means the value of savings is decreasing. Furthermore, RPI inflation which includes housing costs is even higher.
  • The only good news is that inflation is forecast to fall sharply in 2009 as the economic slowdown and lower oil prices feed into inflation.
  • I don't think that this spike in inflation will prevent the MPC cutting interest rates again in the near future. But, it might make them delay cutting rates, which will harm the prospects of a recovery.
Readers Questions:

I answered 2 readers question at my A Level Economic Blog
Feel free to ask questions, especially on the financial crisis

No comments: