UK Inflation: Why should we care?
Sometimes no change is a good thing. For Monday’s (13/09/2016) UK inflation report, this was good news. Data from the Office for National Statistics (ONS) showed that the inflation rate remained the same at 0.6% last month. The ONS is the UK’s independent body for collecting and publishing statistics about the UK economy, society and population.
The cost of food, air fares and fuel increased but it was balanced by price falls in hotels, summer clothes and alcohol. Younger people seem to be the ones most affected by the rise in the cost of living because they spend more on eating out, rent and bills, and less on groceries and eating in. Older people seem to be wiser!
UK house prices rose in July and were 8.3% higher than last July. An average house now costs £217,000 than the £200,000 it did in July 2015.
This is also good news, but many economists believe that 2017 might bring a drop in house prices.
What is inflation?
It is the rate that shows how much prices have increased. It is shown as a percentage: 0.6%.
If last year you went to a shop to buy a chicken for £3.50 and the next year, the same chicken cost you £3.57, that 2% rise in the price of the chicken is inflation. Inflation causes a rise in prices and a decrease in the value of your money, called “purchasing power”. We can say then that the pound is worth less today than last year.
The Consumer Prices Index (CPI) and the Retail Prices Index (RPI) are usually two of the ways to measure inflation. In the year to August 2016, the CPI rose by 0.6%.
When there is inflation there is also a fall in the power of money to buy you everyday goods. If the inflation rate is 0.6%, this means that the price of a product or a service is 0.6% higher than a year ago. In other words, we will spend 0.6% more to buy the same things we bought last year.
When does inflation happen?
1. When there is more demand for goods and services in an economy and less supply, prices rise, and, consequently, there is inflation.
2. At other times, the following three reasons might push businesses’ costs high, which will then make products more expensive for customers. So prices rise when:
a. Raw materials like oil might become more expensive.
b. When workers demand more money or there are not enough trained workers for the skills the companies need.
c. Land rents might be high because there aren’t enough offices and industries built.
3. Another reason that causes inflation is when governments print money to stimulate the economy so that they create more jobs. But when there is a lot of money in circulation, its worth starts to fall. Yes, there is more money, but, because of that, it doesn’t get you more things. It just pushes prices up.
Governments control the inflation rate and try to keep it low by adjusting the supply of money in the economy. In a healthy economy prices usually increase steadily every year by 1% or 2%.
Why is it a bad thing?
If prices, wages and house prices all increased the same every year, it wouldn’t be bad. But nothing like this happens in reality. This is why inflation is not such a good thing after all. While a little bit of inflation keeps an economy growing, and is good if you are in debt!—think of mortgage loans with low interest rates—too much of it is bad.
For one thing, inflation is bad for your savings. If inflation is low, you can save money and organise your future accordingly. Inflation cancels all this and introduces instability. For example, your £200 today will buy you less in 5 years’ time. Also if your income is not rising but prices are, this means you are getting poorer.
But it’s difficult to keep inflation low because there are so many factors that can’t be controlled: from the cost of materials and labour, productivity, taxes and exchange rates going up or down, a growing economy, low interest rates, and even that terrible thing the Bank of England is doing: Quantitative Easing (QE).
What does it mean?
The Bank of England uses inflation data to set interest rates. Because inflation was lower than expected, it seems that the BoE, which is meeting this week, will keep interest rates the same.
After the inflation data was released, the pound dropped to $1.3171 and was down at €1.1720 against the euro.
But could this mean there will be bad news in the future?
Maybe, according to some economists. Already, raw materials are costing more to companies. And many UK companies are facing higher import costs. It is only a matter of time until this affects the high street.
The fall in sterling will eventually drive up inflation. So, we should better enjoy low inflation while it lasts!
Howard Archer of IHS Global Insight said that: “We believe housing market activity is likely to be limited over the coming months and prices will be increasingly pressurized as mounting uncertainty affects the economy and also constrains consumer confidence and willingness to engage in major transactions.
We suspect that business and consumer uncertainty will heighten in 2017 once the UK formally launches divorce proceedings from the EU by triggering Article 50 and the negotiations increasingly come to the forefront.”
So as always, economists aren’t letting us enjoy a little bit of the sunshine. They are expecting the weather to be cloudy with quite a lot of rain. It’s Britain after all...