In the United Kingdom in September, inflation levels rose to a five-year high of 3%. This level of inflation far exceeded wage increases. These inflation levels, as reflected in the rising of the Consumer Price Index, make it more likely that the Bank of England will increase its "benchmark interest rate" from the current 0.25%, in October.
Given the rise of inflation and lack of corresponding rise in wage increase, consumers are faced with the difficulty of making their limited money stretch go even farther than before. According to the Office for National Statistics, food and transportation costs are the primary culprit for driving inflation.
In contrast to the 3% inflation level, the level at which wages rose was 2.1% annually in the three months to July 2017. This meant that workers are currently dealing with the value of their pay packages decrease, in "real terms." Similarly, businesses also feel the squeeze. The Retail Price Index inflation, which is used to set business rates next year, was 3.9%, as of September 2017.
After June 2016's Brexit vote, inflation has sharply increased. The value of the pound has visibly fallen, in comparison to other major currencies. As a result, the price of British imports have risen. Unfortunately, while some analysts have posited a "counterbalancing rise in exports" to help ameliorate the effect of the depreciated pound, this has not occurred. Increasing inflation in September 2017 was also partially the product of rising oil and fuel prices.
Increases in inflation also creates an impetus for the Bank of England's Monetary Policy Committee to increase its benchmark interest rate in November. Interest rates are likely to rise correspondingly, over the next few months, to "curb inflation." This rise in interest rates will be the first time that the cost of borrowing will rise, in a decade.
An increase in interest rates means bigger returns for savers. But it also means higher costs for mortgage borrowers. Increasing interest rates also presents the danger of "choking off all overall economic growth," when Brexit has already increased Britain's climate of political uncertainty, a factor that typically results in saving, rather than spending, as a precautionary means.
With the depreciation of the pound and the resulting rise in the price of goods, the question of consumer spending has become very important. While experts acknowlege that consumer spending is "remarkably resilient" before inflation and weak wage growth, it often takes a long time before the effects of a "squeeze" on household budgets (or a "cost of living crisis") can be felt. Fortunately, in Britain, employment is high and borrowing costs low, for the time being. However, the inflation figure means that 10.5 million households must face losing an average of 450 pounds annually in their benefits, as the British government sustains its four-year payment freeze.
