Goodbye Inflation, Hello Better Times

The Office for National Statistics in the UK has just released new figures showing a drop in price pressure that turns out to be better than expected. To all intents and purposes, this means that the gap is closing between price increases and wage rises. The hike in prices that we have been enduring for far too long, some may hasten to add, seems like it’s going to be curbed. Although, we’ll have to wait a little longer for it to be halted in its tracks completely.

The fall in price pressure is primarily down to two things: petrol and airfares.  Both have seen a hefty fall in prices and that has had a knock-on effect on household budgets across the UK, resulting in a fall in the cost of living increase (from 2.8% to 2.4%). But, that doesn’t mean that there’s slightly more money in the wallets of the average consumer. Let’s not start jumping for joy yet, but, it seems likely for there to be better news around the corner where inflation is concerned. Anyhow, maybe something is better than nothing in the present economic climate. All it means is that the gap between price increases and the average wage increases in the UK is closing in. UK Unions recently published figures that show that salaries in the country are still down by an average of 8.5% compared with 3 years ago. That works out to a staggering fall in real terms of about $2, 200. But the squeeze is slightly less of a strangle-hold on consumer budgets these days and fingers crossed that that gap reduction between prices and wage increases is here to stay.

The Bank of England is optimistic and although not hanging out the bunting quite yet seems to believe that official statistics don’t quite show the reality of the situation at the present time. Threadneedle Street gave the thumbs down to electronic money creation and it looks like we might be on the road to recovery in the near future. But, it’s common knowledge that the UK has been unable to meet unrealistic targets of maintaining inflation below the 2% mark, and it has been suffering from inflation averaging out at over that for the past 3 years now. But, the new figures announcing the slowdown in that increase hail for positive aspects and a better stimulus plan.

The UK hasn’t seen a drop in inflation like this for almost a year now (autumn 2012). The Governor of the BoE, Sir Mervyn King, stated in the final quarterly inflation report (before he steps aside to allow Mark Carney to take the reins) that Britain was heading for a 2% inflation rate by 2015. That’s a fall from the original forecast of the 2015 figure of 2.3%.  Economic recovery in the UK will be slow, but it is getting there it would seem. But, the major risk comes from overseas. Trading partners such as France announced on Wednesday that they had officially entered a period of recession. This could have a boomerang effect on the UK and scupper growth prospects, causing inflation to hike again.

The International Monetary Fund has already recently warned strongly against the quantitative easing methods implemented by the BoE. The slump-busting policies could, according to IMF research, bring about a hefty loss of £80bn for the Treasury. The positive turn in inflation figures, might change that figure. Watch this space!

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