Andrew Neil: CPI inflation to keep rising this year

Andrew Neil
Daily and Sunday Politics
@andrewneilon Twitter

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Receipt and moneyImage source, PA
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The Bank of England claims inflation will fall from early 2012.

Higher fuel, food and transport costs - something every household is all too aware of - have propelled inflation to fresh highs in September.

The CPI, the government's preferred measure, hit 5.2% (well up on August's 4.5%) while the more broadly-based RPI (which better reflects household spending patterns) shot up to 5.6% (from 5.2% in August), the highest for 20 years.

You can see why the government switched the up-rating of welfare benefits to the lower CPI!

Fuel bills are up 8.6% year on year, a major contributor to overall inflation and the severe squeeze on living standards.

Inflation will stay at these levels for the rest of the year and might even creep up further. The Bank of England maintains that it will then start to fall from early 2012.

This is likely: the rise in VAT to 20% in January will slip out of the annual comparison in three months time; continued weak consumer spending will encourage price discounting in the dog days of the new year; and weak global growth will put further downward pressure on commodity prices, including energy.

Just how fast and how much inflation will fall in 2012 is another matter - and the current high levels continue to damage the economy.

The main impact of high inflation at a time of low or zero pay rises is further to intensify the squeeze on living standards.

Anaemic growth

When people feel their pay is not keeping pace with prices (and worry about losing their job) they tighten their belts and reduce spending.

This, in turn, reduces economic growth (consumer spending accounts for almost 70% of GDP).

So growth is likely to be anaemic for the rest of the year and well into 2012. The squeeze on living standards will ease a little when inflation starts to fall next year but most families will just be treading water: pay rises will barely match the lower inflation levels.

That's why growth in 2012 is projected to be modest too.