Your browser is no longer supported

For the best possible experience using our website we recommend you upgrade to a newer version or another browser.

Your browser appears to have cookies disabled. For the best experience of this website, please enable cookies in your browser

We'll assume we have your consent to use cookies, for example so you won't need to log in each time you visit our site.
Learn more

AMP'S WEEKLY ECONOMIC REVIEW

  • Comment
Last week's retail price data must have been very disappointing for the chancellor. He had been hoping to reduce ba...
Last week's retail price data must have been very disappointing for the chancellor. He had been hoping to reduce base rates further to bolster the government's chances of winning the forthcoming general election. The recent strength of retail sales probably dashed that hope. The issue now is whether he will be able to hold rates down until after the election, or if he will be forced to increase them to counter inflation pressures.

The government targets underlying inflation, which excludes mortgage interest payments, and is aiming for it to fall within a 1 to 2.5% target range by the time of the election. In September it rose from 2.8% to 2.9%.

The composition of the inflation rise is particularly worrying. The rise was not caused by erratic items, such as seasonal foods or petrol prices, but by higher prices for clothing and footwear. Indeed, excluding seasonal foods (as well as mortgage payments) the rate of inflation has increased from 3.2% to 3.7% in the last three months.

Retailers are clearly hoping to take advantage of the recent rise in demand to lift their margins. If they succeed - that is if demand remains strong - then a permanent rise in inflation will be a serious threat. Wage demands will rise in response to higher prices and a mini wage-price spiral could develop.

On the other hand, if consumers react by trimming their spending plans, perhaps maintaining the growth of nominal spending, but cutting real spending growth, then prices will be cut again and inflation will subside.

Whether or not inflation is 'dead' in the UK could be decided in the next few months.

Mhairi Mackelworth, AMP Asset Management.

  • Comment

Have your say

You must sign in to make a comment

Please remember that the submission of any material is governed by our Terms and Conditions and by submitting material you confirm your agreement to these Terms and Conditions.

Links may be included in your comments but HTML is not permitted.