Wednesday, 22 January 2014

2% CPI...Is This Good News?

by Alicia Juniper

 Inflation plays an important part in the economy. If inflation is high and prices are rising, then the purchasing power of money decreases. You need more money to buy goods and services than you did before, therefore a low inflation rate is one sign of a good economy and meets an important macroeconomic objective set by the Government. So with the Bank Of England's latest calculation of the inflation rate being just 2.0%, falling from 2.1% last month, does this small amount of inflation really affect us at home?
In the short run, maybe not so much, however in the long run, although the figure of 2% may not seem alarming, a small increase in the inflation rate will slowly but surely erode the value of people's savings and reduce your households standard of living. The cause of the minor drop in the inflation rate is the decrease in the price of fruit, this of course is good news to those who eat a lot of fruit. However, the price of using energy is slowly but surely increasing. This price increase would affect many more than the fall in prices of fruit as the majority of the UK's population tend to use a lot of energy in their day to day lives. This includes heating, lighting, driving and cooking, often regarded as necessities as opposed to luxuries.

The good news is, from this month's readings, inflation is falling and is reasonably stable, hitting the Government's target of 2% inflation. If the inflation continues to decrease, it holds both positives and negatives: the positive outcome being that price levels of goods and services often consumed by the public will not see any sharp rises in the near future. However, if inflation is too low then there will be little demand for products, resulting in the economy grinding to a halt, unable to grow. On the other hand, if inflation rises and wages remain low, the standard of living in the UK is also likely to take a hit. In the case of inflation rates rising, consumption in many categories will most certainly decline. Families will be forced to cut out luxuries like holidays and recreational goods in order to be able to afford essentials like utility bills and council tax.

Since 2000, prices of goods and services have risen by over a staggering 50% according to the Retail Price Index (RPI), Second class stamps, for example, have gone up over two and a half times – from 19p in 2002 to 50p in 2012. Bank of England Governor, Mark Carney, has discussed encouraging higher levels of inflation to stimulate growth. This could mean switching from an inflation target of 2% to 4-5%. In this scenario, house prices could double in the next 15 years, this would particularly affect those like myself who are currently in full time education, as, by the time current students are old enough to consider purchasing a property of their own, house prices would have seen a significant rise and therefore affect their standard of living greatly.

In the case of some countries such as Zimbabwe it is incredibly important for the Government to track inflation rates as they change rapidly over the course of just a day; this is an extreme case of hyperinflation. Zimbabwe's peak month of inflation is estimated at 6.5 sextillion percent in mid-November 2008 and in 2009 Zimbabwe finally abandoned its currency. As of 2014, Zimbabwe still has no national currency and instead currencies from other countries are used. But in the UK we have never experienced a huge case of hyperinflation, in fact the inflation rate has not risen above 4.48% since 1992. As it stands, given the latest inflation rate of 2%, the UK's inflation seems stable and price levels are not fluctuating rapidly. However it is important to be aware of the problems that both high and low inflation can cause in the future.





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