Inflation set to rise and rise?

By Eleanor O'Neill, Student Blog

13 February 2017

What does the rate of consumer spending, the falling price of oil and a forecast warning from the Bank of England all add up to?

The annual inflation rate in developed countries is at its highest level since 2014, according to research from the Organisation for Economic Co-operation and Development (OECD).

After months of build-up, some are claiming that this level of sustained growth suggests 2017 will be the start of a calm period after the influx of stimulus measures introduced by central banks in response to global uncertainty and fears of deflation.

However, the OECD warns that the trend is unlikely to continue without an advancement in economic growth and global wage increases to encourage continued consumer output.

The everyday spender has also come under scrutiny by the Bank of England after reports have emerged of households relying more on lines of credit and life savings to retain spending levels. 

Debt charities have warned that unsecured customer credit is fast approaching the levels of the 2008 economic crash as consumers turn to credit cards, loans and second mortgages in order to keep up.

Governor Mark Carney noted in January that consumers were carrying the UK economy in a model that would be difficult to maintain once a weaker pound translates to import costs and the inevitable higher pricing of goods.

The central bank made the decision to increase the inflation forecast in the first quarter of 2017 while holding interest rates at the record low of 0.25%.

Consumer credit continues to soar, and this is something we should all be concerned about.

"Over the next few years, a consequence of weaker sterling is that the higher imported costs resulting from it will boost consumer prices and cause inflation to overshoot the 2% target," they said. "This effect is already becoming evident in the data. CPI inflation rose to 1.6% in December and further substantial increases are very likely over the coming months."

One of those immediate effects is the price of crude oil, which generates about 5% of a developed economy’s consumer price basket, and is embedded in key CPI indicators like the costs of petrol, food and international travel.

“Consumer credit continues to soar, and this is something we should all be concerned about amidst the current uncertainty over the UK economy,” warned Joanna Elson, Chief Executive of the Money Advice Trust. “Most people are currently able to handle this extra borrowing, but if the economy does indeed suffer in the years ahead, these extra debts could become even more difficult to repay.”

However, in most cases, a prolonged period of inflation reduces the value of debts as the amount owed doesn't change to reflect lower currency value. The real risk belongs to pensions and savings as inflation reduces the spending power of money.

Tom Stevenson, Investment Director at Fidelity International, said: "With the Old Lady of Threadneedle Street [Bank of England] prepared to keep sitting on its hands when it comes to raising rates and with inflation expected to breach the central bank’s 2% target this year, anyone with savings still sitting in cash will struggle to generate real returns."


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