Inflation Surges To 3.7%

Published: 18 January 2011 By MoneyHighStreet Staff Leave a Comment

The UK Consumer Prices Index, a key measure of inflation, jumped to 3.7% in December, a large increase from the 3.3% for November.

With the inflation target set at 2% by the government and Bank of England, there is now a substantially increased risk that interest rates will have to rise to halt further inflationary pressures.

The inflation figure for December does not include the latest rise in VAT which will increase the cost of most items by a further 2.5% from January onwards.

The VAT increase and surging costs of oil coupled with the latest rise in fuel duty will push the cost of goods up further which will boost inflation higher in the months to come.

Rising inflation is hitting consumers hard as a basic rate tax payer needs to earn 4.625% gross on their savings to maintain their spending power. A high rate tax payer needs a gross savings rate of 6.17%, says Andrew Hagger of Moneynet.co.uk.

However these savings rates are unobtainable with the current base rate so the pound in every consumers pocket is gradually being devalued as the cost of living soars.

Whilst the huge government cutbacks and job losses in the public sector are expected to curtail the spending habits of many people, thereby helping to bring down inflation over the next two years, this rise in inflation was more than economists and the Bank of England forecasted.

As a result, some city analysts are predicting that the Bank of England will be forced to increase interest rates in May.

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