What actually is inflation? Inflation is the amount a which products or service increase in price over a given amount of time. The most commonly used scales for this are the CPI (consumer price index) and the RPI (retail price index). Each looks at a whole host of products that most people buy on a regular basis, such as bread, ipods, tickets for cultural and music events as well as the cost of a pint in your local bar or pub. From this they graph how the prices rise or fall over time.
The major difference between RPI and CPI is that the RPI includes the cost of housing, such as mortgage interest payments and the average cost of council tax. Therefore if the CPI index is at 3%, that means that a product you buy will cost 3% more to re-buy a year later.
So what’s the big deal? Currently inflation is at around 3.7%, it’s highest level since April 2010. This is partly due to rising energy costs and to prices of food spiralling upwards. The Bank of England (BoE) has set a target of 2% and hopes to do so for 2012; but we are already close to double that targeted figure.
Economists have predicted no infantry change, but as the market is not a precise science there are many variables. Petrol and fuel have skyrocketed in cost, food is at an all time high, rising 1% in a month! This is the largest rate rise ever recorded and is double the norm. And as the public sector are set to take massive cuts, no one knows what’s next in store.
The BoE policy board claim not to be going ahead and raising interest rates to combat this claiming that the recent VAT increase plus food and fuel factors are behind inflation. The MPC claim that this rise will be short lived, however it seems unlikely that both will fall rapidly, especially with current population growth. The Euro zone currently have inflation of only 2.3% and this is a source of embarrassment for the BoE
The RPI however puts inflation at 4.7%. With rising rates and fiscal tightening, businesses and the public are being pressurised like never before.
An interest rate rise to 1.5% would add 87 to monthly repayments on a typical 150,000 mortgage – an extra 1,044 a year. This would be a bonus for Britain’s multitude of savers, who really lost out when interest rates dropped to a historical low of 0.5% back in March 2009.
There is a danger that any further squeeze could damage family finances further and send the recovery into free fall.
The problem is, the public will be forced to swallow a lot of unsavoury news in the meantime and will need someone to blame. The Bank of England may be feeling somewhat deflated right now. Perhaps a sensible option would be for the Bank of England to revise its forecast of inflation rising to 2% up to 4%, thus reducing the pressure to elevate interest rates…
When the time does come to sell your home, make sure you consult a trusted conveyancing solicitor for all the advice you need.