The UK economy has lost £10bn over the last three years due to high inflation, a new report from the Ernst and Young (E&Y) Item Club has revealed.
According to E&Y high inflation will be a “permanent fixture” for the UK and it will have a “corrosive impact” with the rate averaging 3.5%, rather than the UK government’s set target of two per cent.
The Item Club report does not expect inflation to drop below 2.5% before 2017, said E&Y, but figures just released by the UK government’s Office for National Statistics contradict this showing that the UK’s inflation rate fell for April 2013 fell to 2.4%, down from 2.8% in March. Lower petrol prices and air fares helped the consumer prices index (CPI) to fall for the first time since September 2012, but food prices continued to rise as cold weather hit crop production, so the April figures may just be an aberration.
Continued high inflation may eventually prompt the UK government to raise interest rates to slow down inflation, but this room for this manoeuvre is negated at the moment by the need to support a fragile economy. The UK has still not recovered the ground lost since the 2008 financial crisis in terms of its gross domestic product (GDP) figures. With this in mind, treasurers can expect the present low interest rate environment in the UK to continue for some time until a more robust economic recovery can be established.
One of the main reasons for the rise in UK inflation has been the fact that consumers have been struggling to cope with food prices that have risen 40% since 2007, says the E&Y Item Club report, correctly identifying one of the long-term trends that will continue to push up inflation. Simultaneously, the cost of fuel and education in the UK has also soared over the past five years, although fuel costs at least do now appear to be under control.
The group expects CPI will still rise to three per cent this summer, however, before falling back to 2.5% by the autumn when food prices are expected to stabilise. The next monthly figures in May will prove if the fall in UK inflation for April was an aberration or not.
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