In February this year, the Bank of England released its quarterly inflation report. Used to explain interest rates decisions and forecast inflation prospects for the UK, it’s an important tool for businesses and organisations to understand the financial health of the UK.
The Government’s annual inflation rate target of the Consumer Prices Index (CPI) is 2 per cent. In February, it increased 2.3 per cent year-on-year, marking the highest inflation rate since September 2013. This was driven by rising fuel prices and the first increase in food costs for 34 months.
The rapid growth in inflation is in stark contrast to the country’s record low of 0.10 per cent just two years ago. Since the summer’s Brexit vote, the rate of inflation has more than doubled, as consumers wrestle with rising prices, aggravated by sterling’s fall in value. With food and transport costs using up a bigger portion of people’s disposable income, the cost of living is increasing.
British households are beginning to feel the strain, with a recently released survey by pension provider Scottish Friendly showing that 70 per cent were concerned about the likelihood of rising prices.
“Global food commodity costs have risen by 17 per cent on average over last year's figures, building substantial pressure in the food supply chain,” explained Helen Dickinson, chief executive of the British Retail Consortium (BRC). “The squeeze on household disposable incomes will tighten as the year progresses.”
With sterling struggling, rising import costs will trickle through the supply chain. This squeeze will compound already weak growth in disposable income which, according to supermarket chain Asda, is at its lowest since June 2014. Meanwhile, a European Commission survey which began in the 1980s revealed that the largest-ever number of British food and beverage retailers expect to increase their prices in the coming three months since.
Of course, the cost of living isn’t just determined by food and fuel costs; rent and mortgage fluctuations play a significant role in real income. According to the Valuation Office Agency, the average monthly rent in the UK is now £839, up from £819 in December 2015. What’s more, the average cost of buying a house has now jumped to £305,000, up from £286,000 in the same period – signalling a rise of 6.7 per cent.
In the space of one year, the cost of filling up a 50 litre car has risen by £9 up to £60, while a train season ticket that cost £1,000 back in January 2016 will set you back £1,023 just 12 months later. Inflationary pressures and price rises are also affecting utility bills. According to MoneySavingExpert.com, back in January 2016, the most affordable gas and electric rate was £765. Within twelve months it had soared to £834.
Adding to the pressure, Britain’s slow wage growth is also causing pain. Although employment has risen – falling to just 4.7 per cent in the three months to January 2017, wage growth is faltering. This means that, with inflation slicing a chunk out of wages, real income growth has dropped to just 0.6 per cent.
There is some good news for households though. Surprisingly, although the cost of living has crept up, London has fallen down the list of the world’s most expensive cities, dropping to 24th place.
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