BOE between a rock and a hard place
The CPI Inflation figures are released this morning at 9.30 GMT and they may prove difficult reading for the Monetary Policy Committee. If as forecast the figures show the cost of goods rising at 4.2%, it will mean British consumers are facing their fastest price increases in more than two years – at a time of high unemployment and low wage growth. In a sign that high inflation is impacting on our living standards, a new report from the Institute of Fiscal Studies shows that the average households ‘real income’ – what is coming in after inflation is taken into account – will have fallen 1.6% over the three years to the end of 2011. So on average all your hard work is getting you about £16 less spending power for every £1000 you get in, which is about five pints of your favourite ale, lager or bitter.
In recent weeks, Mervin King and his Bank of England colleagues have been warning that a squeeze on people’s incomes is inevitable, as the government tries to manage the UK’s national debt. With this in mind, our very generous Chancellor has said he will announce no new tax increases or spending cuts in tomorrow‘s budget. However, with a £111 billion austerity programme in place, VAT increased to 20% and record fuel costs there is not much more the Chancellor could throw at us. In the past these circumstances have resulted in labour unions demanding higher wages for their members, but with people acutely aware that the jobs market is weak, they are in no position to demand above inflation pay rises. So for now, the outlook remains rather gloomy.
On a positive note, if you are importing from America or even going on holiday there this summer, now may be the time to buy your dollars – after the pound reached a 14 month high against the greenback at 1.6358. The expectation that UK inflation figures could be higher than the forecasted 4.2% appears to the main driver for sterling’s strength – with a higher inflation figure putting additional pressure for the BOE to increase rates. With the US Fed taking a loose monetary stance and unlikely to consider raising rates before 2012, this has also weighed on the dollar.
Sterling’s performance against the euro was not quite so impressive with GBP/EUR trading slightly up at 1.1480, with it gaining some support ahead of the inflation figures, but still near fourth month lows. Apart from UK inflation figures today, keep an eye out for UK public finances also released at 9.30 GMT, which will show how much money the UK needed to borrow in February.