ëWelcome news for consumer spending powerí as UK inflation rate falls to 1.5%

ëWelcome news for consumer spending powerí as UK inflation rate falls to 1.5%

Consumers across the UK have seen the inflationary pressures on their wages softened over the past month, with the latest annual disclosure indicating that it fell to just 1.5% in the year to August.

The Consumer Price Index (CPI) dropped to 1.5% last month from its previous value of 1.6%, the Office for National Statistics outlined, citing a fall in the prices of petrol, food and non-alcoholic beverages as the driving force behind the occurrence.

The news has kept the pressure off the Bank of England to raise their base interest rate from its historically low value of 0.5%, after an intense period of speculation which has seen economists suggest that policymakers were starting to move in the direction of instigating a first rise by the end of this year

However, the confirmation that the inflation rate in the country, as measured by the Consumer Price Index, has remained below their target of 2%, has meant that it is now more likely that a rise will be deployed at some point during the opening 6 months of next year.  

The market costs of food and non-alcoholic beverages dropped by the sharpest value in August, with the Office for National Statistics (ONS) disclosing a decade-high drop of 1.1%.

A spokesperson for the ONS argued that increasing levels of competition between the leading supermarkets in the country had contributed heavily to the steep fall in food and drink prices, also highlighting that a particularly cold winter in the 2013/2014 period had meant that prices for food had been heavily inflated a year earlier.

Nevertheless, the strain on consumerís wages have continued to be substantiated in areas outside of food and drink with the ONS identifying that the costs of clothing, transport and alcohol had all risen at a brisker speed than the actual inflation rate itself.

This was reflected in the value of the core inflation rate, which does not take into account the costs of alcoholic, tobacco, food and energy, illustrating a hike of 1.9% in the year to last August.

Jeremy Cook, chief economist at currency exchange organisation World First, highlighted this reality and suggested that a lot more needed to be done to ensure the countryís long-term economic stability.
“For all the chatter, guesswork and prophecy around possible rate hikes in the UK, inflation is currently sat at a five-year low,” said Jeremy Cook, “Of course, the headline figure does not tell the full story. Core prices surprised higher by 1.9% in August; they were unaffected by the slips in oil prices or the 1.1% decline in food and booze through the past 12 months.”

Wage squeeze continues; consensus suggest rate rise should be delayed

Whilst the news of another fall in the countryís inflation rate has been universally welcomed across the political spectrum, a number of parties have nevertheless argued that serious problems remain in the complexion of worker wages at present.

The slow rise in wage growth in the UK over the past five years, at a rate often lower than the inflation rate over the same period, has led many to brandish the country as being in a ëcost-livingí crisis where the spending power of consumers has been steadily reduced due to this occurrence.

Howard Archer, chief UK and European economist at IHS Global Insight, has responded positively to the recent fall in inflation, describing it as ëwelcome news for consumersí purchasing powerí in a time where they are still plagued by stagnant wage growth. Mr Archer said: “August’s muted consumer price inflation is welcome news for consumers’ purchasing power as they currently continue to be hampered by very low earnings growth. “Indeed, even consumer price inflation of 1.5% in August is still more than double current underlying earnings growth.” Archerís underlying assertion that wage growth must be addressed to ensure that individuals in the UK begin to enjoy the real-effects of the countryís recent economic upturn was reflected in the reality that CPI inflation has continued to outstripped wage growth, which increased by just 0.6% in the 3 months to June 2014 compared to June 2013. The Shadow Treasury Minister, Catherine McKinnell, MP, has argued that whilst the inflationary pressure on worker wages has thankfully fallen, that nevertheless slow wage growth has meant the country remains in a ëcost of living crisisí where higher living standards are only enjoyed by the few, rather than evenly.

She said: ìWhile this fall in the rate of inflation is welcome, the squeeze on working people continues.
ìThe most recent figures show pay rising by a record low of just 0.6 per cent – less than half the rate of inflation. Wages after inflation have now fallen by over £1,600 a year under this Government.

ìLabourís economic plan will tackle the cost-living crisis, make Britain better off and earn our way to higher living standards for all, not just a few.î This stance has been reiterated by the General Secretary of the TUC, Frances OíGrady, who has called on the Bank of England to retain their base interest rate at its current low of 0.5% until wage growth begins to improve, citing that any rise now would ëchoke off the economic recoveryí by raising the financial burden from things such as mortgages and personal loans on a plethora of households across the UK.

Ms OíGrady said: ìWith inflation well under control there is no case for raising interest rates any time soon. It would dump higher mortgage costs on households still feeling a squeeze on their living standards and risk choking off economic recovery. ìAs the Governor of the Bank of England said last week, British workers have faced pay cuts deeper than at any time since the 1920s. The priority now has to be wage rises to ensure a sustained economic recovery.

The British Chambers of Commerce (BCC) have been long-term advocates of keeping rates low until wage growth picks up, and the organisation have argued that the data released today has reinforced the validity of their line of argument.

BCC chief economist David Kern, has called on the Bank of England to wait until next year to raise interest rates, so that the economic recovery maintains its upward trajectory. And urged the government to focus on boosting areas such as the countryís business and exporting sectors, so employers are put in a stronger position to pay their workers more.

He said: ìThese figures highlight that inflationary pressures in the economy are easing and remain well below the 2% target. The drop in inflation alongside the recent stagnation in wage growth will relieve pressure on the Bank of England. While the UK recovery remains on track, this is clearly not the time to put the recovery at risk with premature interest rate rises.

ìThe main priority for the MPC must be to nurture business confidence by offering the stability of working in a low interest rate environment. To secure a lasting recovery the government should continue to provide further measures in key areas such as improving access to finance for growing firms, and supporting UK exporters.î However, Alasdair Cavalla, economist at the Centre for Economics, has compellingly argued that the slow growth in wages across the UK has actually contributed to inflation being kept relatively low.

Cavalla said: Two main factors have kept the UK inflation rate below the Bank of Englandís central target of 2.0% over the past eight months. Weak wage growth for consumers has helped prevent prices from taking off with the recovery. In this sense, the low inflation rate is something of a relief as it has prevented living standards from falling too far over the year so far.

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