Financial Reform

Tag Archives: inflation

Inflation Falls On Weak Consumer Demand

In face of weaker demand among consumers, retailers have been forced to cut prices considerably. As a result, inflation has hit a six month low. The inflation rate now rests at 4.2%. This is a staggering drop from the 4.8% rate in November and the 5.2% peak rate the economy faced in September. The Office for National Statistics also reported that the rate of retail inflation dropped from 5.2 to 4.8%.

This was predicted by the Bank of England a long time ago. Economists from the central bank argued that the inflation rate would have to drop as consumer demand fell. Household spending has declined considerably and customers have collectively been forced to cut costs.

The drop in inflation may be difficult for many retailers already struggling to maintain sales projections and healthy profit margins. However, the change in the consumer price index is welcomed by many consumers who have already been struggling to get by with existing prices.

The drop in inflation is especially welcomed by many people who are facing reductions in government benefits over the next year. Many of these people are literally forced to decide between paying rent and buying food to support their families. The last time the inflation rate dropped so considerably was three years ago, when the value added tax dropped in response to the global financial crisis.

According to Chris Williamson, a leading economist with Markit, the inflation rate is likely to continue to decline over the coming months. Williamson said that this is a necessary development as the UK economy struggles to regain its ground.

In addition to making life easier for consumers, a declining rate of inflation may be necessary to rebuild capital and improve the efficiency of financing. A reduction in inflation also suggests that the Bank of England may be able to start a new quantitative easing program in February. That decision will be announced when the BoE publishes its quarterly report.

As the country continues to face the possibility of  a new recession, the UK is looking forward to any positive economic data available. Although a declining rate of inflation isn’t a guarantee that the economy will turn around right away, it offers new hope and places less of a burden on many consumers throughout the country.

Household Budgets Continue to be Stretched

This week’s Inflation data is predicted to reveal that household budgets will continue to be stretched as sustained inflation, muted wages and high unemployment show very little sign of recovery.

Salaries are still expected to lag behind soaring living costs, and the labor market will further decline.

Earlier this month, Sir Mervyn King, the Governor of the Bank of England, had warned of a “long and deep squeeze in real living standards” that will stretch further into 2012.

Wages dropped in 2010 for the first time since the largest budget squeeze in 1982, and is threatening to plunge again this year.

Inflation is overtaking pay rises, while the deteriorating demand for labour is limiting the workforce’s bargaining power.

Professional Auditory Services firm, KMPG, states that Britain’s economy is “getting gloomier,” and that “There was no real reason to think that earnings are going up” because “they are still pretty well stuck.”

Meanwhile, unemployment is rising. The claimant count of jobless people rose by 24,500 to reach 1.52 million, while the broader labor force poll dropped by 26,000 within the months of February, March, April to May.

The figures for the average weekly earnings, also predicted to show gloomy reading, are soon to be released on Wednesday.

Europe’s growth data, is predicted to show an extreme slowdown in the currency.

Analysts predict only a 0.3 percent growth in the embattled eurozone economies for the second quarter. Capital Economics, an Independent consultancy firm, states, “the recovery is faltering.”

OECD Urges Bank of England to Raise Interest Rates

The Organization for Economic Co-operation and Development addressed The Bank of England to raise interest rates in order to control inflation.

Interest Rates

The Economic body said normalization will start this year in order to prevent inflation expectations from soaring. Currently inflation runs at 4% – double its 2% target.

OECD showed its support for the deficit reduction plans by the Chancellor, and believes the inflation will plummet after next year, 2012. The organization mirrored Andrew Sentance’s call to immediately start tightening policies.

The Monetary Policy Committee member is retiring in June and will be replaced by Ben Broadbent, the former Goldman Sachs economist.

On his final speech Sentance spoke of the need for a sharp change in policies, especially with the ongoing inflation that makes its impact on wage and price-setting that continues to be a threat to the economy’s recovery.

He claimed a possibility of a future “structural scarcity” on energy and commodity prices to occur, leading to further significant price hikes. He predicted prices in fuel could go up to $300 in a span of 20 years, and insisted the Monetary Policy Committee to ““stop considering commodity price moves “one-offs”.

Broadbent shares the same perspective. The former Goldman Sachs economist supports BOE in keeping rates low.

Regardless of decreasing UK growth in 2011 from 1.5% to 1.4% and from 2% to 1.7% for the next year, the international organization kept its global predictions at 4.2% and claimed recovery improving.

Secretary General Angel Gurria, only however, said “The crisis is not over yet, it has just changed its skin.”