As UK interest rates enter a third year of record lows and inflation sits at 4.5% (as measured by the CPI index), the clamour to raise interest rates to reduce inflation seems to have abated, and the general view is that we may not see a rate rise until some time in 2012. This is bad news for savers who have every right to ask why.
The answer, in fact, is that we may be experiencing ‘the wrong type of inflation'.
Experts refer to different types of inflation. One type is known as ‘Demand Pull' and the features are:
- Strong Economic growth
- High employment
- Rising wages
- Easy credit
- Booming property prices
- A prosperous population
The result is increased consumer spending, rising demand, and inflation. Once interest rates are increased, spending is curtailed and inflation reduces (albeit several months later).
Compare that with the current position:
- Weak economic growth
- Rising unemployment
- Static or falling wages
- Banks reluctant to lend
- Falling property prices
- A population tightening their belts
In fact, our current high inflation is caused by rising food and commodity prices, and by tax rises (VAT and fuel duty). This effect is known as ‘Cost Push' as retailers pass on their increased costs to consumers with inflation rising as a result. Raising Interest rates will have no impact on this type of inflation, and this is the reason why the Bank of England have kept rates so low for so long
The good news is that inflation is expected to reduce naturally in 2012 as the rising costs and tax increases will be more than 12 months in the past.
The bad news for savers is that low interest rate may be with us for some time.
To find out more about saving and investment options do not hesitate to contact James Keane on 01244 347583