UK inflation soars

coins_in_squeeze_410Inflation in the UK has risen to 4.5% in August, up from 4.4% in the previous month, according to the latest figures from the Office for National Statistics.

Weak economic growth has suppressed domestically generated inflation pressures yet fuel costs, utility bills and taxes rises are keeping inflation stubbornly high.

UK inflation has been well above the Bank of England’s target of 2% for some time, dividing opinions on whether interest rates should rise. It is also far higher than the average inflation rate for the Eurozone, which the Statistical Office of the European Union last put at 2.5%.

Andrew Goodwin, a senior economic advisor to the Ernst & Young ITEM Club, says there is “probably worse to come in the short-term” as utility bills were surprisingly small in August and energy companies have recently announced price rises.

“We suspect that the effects of higher energy bills will continue to feed through in the September figures and, with unfavourable base effects also due to come into play, we could still see inflation breach the 5% barrier,” Goodwin says.

“Given the deterioration in the growth outlook in recent months, and the fact that wages remain so subdued, it’s difficult to see how inflation can be sustained at above target rates once the temporary factors have faded away.”

The Ernst & Young ITEM Club expects inflation in the UK to fall at the beginning of next year.

Earlier this summer, three of the nine members of the Bank of England’s Monetary Policy Committee voted to increase interest rates in the UK in order to combat rising prices.

Rising concerns over the health of the economy, however, prompted all nine members to vote in favour of keeping the interest rates at a record low of 0.5% during the last meeting.

©2011 funds europe