‘Significant threat!’ Inflation hitting four percent will slash £700 off household incomes
The Resolution Foundation is predicting that the UK’s inflation rate – which hit a two-year high of 2.1 percent last month – is on course to top 4 percent later this year. This would slash £700 off average household incomes – affecting living standards and creating a problem that the government cannot ignore, it warned.
It mirrors a trend of rising inflation already seen in the US, but increases on this side of the pond will be less stark, it said.
James Smith, research director at the Resolution Foundation, said: “With the US experiencing the fastest rise in inflation in nearly half a century, and the UK also experiencing sharp increases, many people are getting increasingly worried about a possible price spiral.
“While UK inflationary pressures are nothing like as stark as the US, we could still see inflation breaching four percent this summer, a figure well in excess of the OBR and Bank’s expectations.
“The temporary nature of this inflation spike means the Bank can look through it and avoid premature rate rises, but the £700 hit to living standards it will bring means households and the government cannot afford to ignore it.
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It is also vastly higher than its current interest base rate of 0.1 percent – a historic low brought in to try and encourage borrowing amid the coronavirus pandemic.
And while some inflation is good – a four percent rate is double the Bank of England’s target and could trigger further rises.
Traditionally it has been curbed by raising interest rates.
But with the current economic climate, and the amount of cheap borrowing that both the government and companies have undertaken during the pandemic – increasing the cost of debt could hamper or threaten any recovery.
Other economists painted a rosier picture and said that a strengthening pound and adequate labour supply are likely to keep inflation under control.
Speaking last week after the inflation rise was revealed, Grant Fitzner, chief economist at the Office for National Statistics (ONS), said: “The rate of inflation rose again in May and is now above two percent for the first time since the summer of 2019.
“This month’s rise was led by fuel prices, which fell this time last year but have jumped this year, thanks to rising crude prices.
“Clothing prices also added upward pressure as the amount of discounting fell in May.”
The ONS said higher transport and motor fuel costs were a major contributor to the jump in inflation, as crude oil prices increased amid pressures on supply.
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