We’re Freezing VAT

You will probably be seeing a lot of shops, web sites and marketing emails proclaiming that “We’re Freezing VAT!”

“Brilliant – the VAT rise will not be hitting me too hard!”, you think. And then you look at the small print. “…until mid January” or even “…until the end of January”.

Retailers are desperate to get you spending now, to take away the pain of the VAT rise and to keep money pouring into their tills, because they know that sooner or later we will notice that prices have gone up.

When we suddenly see that everything we buy is slightly more expensive then our wallets are more likely to remain closed. That new TV or dishwasher can wait. Do we really need to move house now as the estate agents, solicitors and removal men will all be 2.5% more expensive?

So what will happen then? Will we spend less as a nation and therefore not boost inflation to a level that may trigger a rise in interest rates, or will we carry on as normal once we forget what prices were in December 2010?

After a few months, I believe it will be the latter. After a few months, once we have forgotten what prices were, and really do want to buy that TV, then we will go ahead and spend as usual.

And that will force inflation upwards and makes a rise in interest rates more likely. So we will all end paying more for our mortgages too. Happy New Year!

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