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Current issues: Inflation update

Inflationary pressures in the UK eased slightly during June, curbed by weaker consumer spending. The Consumer Price Index (CPI) rose at an annualised rate of 4.2% during June, down from 4.5% in May, which, according to the Office of National Statistics, was primarily the result of lower prices for recreational goods such as computer games, toys, televisions, and digital cameras.

Nevertheless, the rate of inflation remains significantly higher than the Bank of England’s (BoE’s) government-set target of 2%, although the Monetary Policy Committee’s (MPC) latest inflation report indicates they believe inflation will subside below target after 2012. In the meantime, the MPC continues to grapple with the conundrum of how best to cool inflationary pressures without derailing the UK’s sluggish economic recovery. Interest rates have now been at a record low of 0.5% for over 2 years yet seven members of the nine-person MPC voted in favour of maintaining this low, believing that higher tax rates and cuts in public spending are set to have a further depressive effect on prices

The British Chambers of Commerce (BCC) has pointed out that many of the factors fuelling inflation are beyond the control of the MPC: domestic inflationary pressures are being exacerbated by external factors, such as natural disasters and war in key commodity-producing countries. As a result, the BCC has urged policymakers to postpone any increases in interest rates until the fourth quarter of 2011 at the earliest.

Pearson Hinchliffe Financial Services | Hollinwood Business Centre, Albert Street, Hollinwood, Gtr Manchester, OL8 3QL
Telephone: +44 (0)161 785 3500, Fax: +44 (0)161 624 2589, Email: enquiries@pearson-hinchliffe.co.uk