Inflation Increase increases Prospect of Future Rate Rise

The UK CPI measure of inflation rose from 2.7% to 2.8%. The old rate RPI, which includes the cost of council tax and mortgage interest payments rose to 4.6%. Many feel this RPI measure is a more accurate reflection of individual living costs. On this basis real interest rates are quite low. – only 5.25% – 4.6% = 0.65%. Therefore it is quite possible that interest rates could rise significantly to reduce consumer spending. Those with mortgages could see a significant increase in their cost of living.

However although many people’s cost of living is rising by 4.6% or greater, wages are rising comparatively slowly as they are based on the more conservative CPI measure of inflation. Thus rising interest rates would squeeze household’s disposable income further.

Recently the governor of the Bank of England admitted they had helped to cause a consumer boom in the UK. He said low interest rates had been necessary to stave off a global slowdown. However it had the unfortunate side effect of boosting consumer spending and causing a house price boom.

This suggests the limitations of Monetary policy in dealing with various objectives at the same time.