The CPI figure for December 2009 was 2.9%, much higher than expected leaving many question marks about the continuation of low bank base rates.
The 2.9% figure was partly due to unchanged fuel prices and less retailer discounts on the high street. The big question is what will January 2010 bring? With VAT now back up to 17.5% from 15% in December this alone could push CPI above the bank’s CPI target of 2% inflation.
Any prolonged period of inflation will put pressure on the Bank of England to raise base rates from their historic low of 0.5% much sooner than analysts had previously been predicting.
As 2010 is set to be the year when everyone will start to feel the effects of substantial budget cuts the last thing the economy needs is higher interest rates at a time when jobs are being lost. The real danger is stagflation, where interest rates increase while the economy falls (back) into recession. Stagflation would have very serious long term consequences and is really the last thing we need.
The coming months are going to be very interesting, key points will be:
- Economic growth (or not) for Q1, 2010
- CPI growth in Q1
- Announcements on where budget cuts will be targeted – expected after the general election in Q2, 2010.
On the subject of budget cuts there is a growing concern that these will hit public services and as a result those towns and cities which have a greater local economy reliance on public sector employment. If you are looking to invest in property it would be wise to research local economic dependencies before choosing to buy.
