Inflation spectre - 16/11/06
Is inflation returning to haunt our savings? September saw the highest rate of inflation for eight years, writes Paul Lewis
Is inflation returning to haunt our savings?
September saw the highest rate of inflation for eight years. The retail prices
index (RPI) was up by 3.6% - the highest annual rise seen since June 1998. Of
course that is modest compared with the 1970s and ’80s. Saga readers will
remember May 1980 when inflation hit a staggering 21.9% and over the next ten
years the value of money in our savings accounts halved. Nothing like that is
on the horizon, though the Governor of Bank of England, Mervyn King, has warned
that inflation will carry on rising until at least Christmas.
His job is to bring inflation down to the
Government target of 2%, not using the RPI but a different measure of inflation
called the Consumer Prices Index (CPI). It is usually lower than the RPI
because it excludes housing costs such as mortgages and council tax and uses
slightly different arithmetic. It shows inflation at 2.4% in September, a
fraction down on August but still as high as it has been for ten years.
I reported a couple of months ago on work by
Alliance Trust which showed that people over 75, who spend a bigger proportion
of their income on essentials like heating and food, were subject to a much
higher inflation rate than younger people, who spend more on imported goods
which have come down in price. This month Alliance Trust says the effect is
getting bigger. While prices as measured by the CPI fell slightly for all age
groups under 75, those over that age saw inflation rise again – to 3.9%
compared with the CPI’s 2.4%.
Economists seem confident that inflation is not
going to return with a vengeance. They say the Bank of England has done an
excellent job since Gordon Brown gave it the independence to fix interest rates
and keep inflation down. But they admit that there is a danger lurking on the
horizon – China.
Over recent years China
brought inflation down as it became the world’s factory and filled our shops
with cheap goods from teddy bears to cameras. But that effect may now have been
replaced with a different China syndrome. It is consuming vast quantities of
raw materials such as oil and steel and that pushes up the price for the rest
of us. If there is an inflation spectre on the horizon it could, like so many
things today, be ‘Made in China’.
One good thing about the high RPI in September is that
it is the one used to put up pensions. If the Government follows the normal
rules the basic retirement pension should rise by £3.05 to £87.30. Pension
credit is increased with earnings which rose by 4.4% so that should go up by a fiver
to £119.05. Actual rates will be announced around the start of December.
This article was created: 10 November 2006.
This article was last edited: 28 November 2006.
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