Tim Kellett
PAYdata Blog, 17 February 2011

Tuesdays reported rise in the UK Consumer Prices Index (CPI) to 4% only provides more bad news for the economy.  This means that CPI has now been 1% or more above the Bank of England’s target percentage for over a year, and is currently the highest it has been since November 2008.

However, the rise only serves to increase pressure on the Bank to lift interest rates and that risks stalling an already fragile recovery.  The consensus from analysts is that interest rates will rise in May or June at the earliest, although there is obvious pressure for this to happen earlier.  The Retail Prices Index (RPI) currently stands at 5.1%, which includes mortgage interest payments, so any increase in interest rates will only serve to inflate RPI as well.  This will in turn put pressure on employers to increase pay. 

It will be interesting to see how the Bank of England will take this latest rise and whether its forecast that inflation will be at or below its target by the end of the forecast period, will have to be revised.

Looking at the wider picture, both the Bank and the government believe that the public need to go through the pain now in order to receive a higher gain in the long term.  The UK public no doubt hopes the pain does not last much longer and the gain arrives quickly.

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