The latest inflation figures are not looking good. Although they did not go up in August, they didn’t go down either and at 3.1% they remain a long way from the Bank of England’s 2% target.
Inflation had been falling slightly over the last quarter, but with the rate remaining the same in August, that down trend has terminated.
City economists had predicted the rate to fall slightly to 3% which would have maintained the downward forces on inflation, so there is some concern that we could see higher inflation during the next few months.
The impact of the VAT rise to 20 percent in January will also force inflation upwards. The high prices of petrol and food are not helping either.
We all know how the battle with inflation is fought – by controlling interest rates.
Although the base rate was kept on hold again at 0.5% this month, as inflation continues to creep up, the voices of dissent within the Monetary Policy Committee will inevitably get louder.
With the economy still teetering on the edge of a double dip recession, the BoE has to be careful not to step on the brakes too hard and for that reason it is very likely that the base rate will remain at 0.5% for the rest of the year.
Next year will be a different matter, though. That dreaded VAT rate rise will force inflation up further and if the economy does not slow down then there will be stronger forces driving inflation upwards.
“I forecast February of next year as when rates should rise first.”, says Jeremy Cook, economist at World First, a currency exchange broker.
If Mr Cook is correct then just as we are reeling from the VAT rise in January, we may well then get hit with the double whammy of a rise in interest rates in February!