MPC surprised by strength of UK inflation; savings accounts suffer

While the inflation rate in the UK dropped to 3.1 per cent, down one tenth of one per cent from its June high of 3.2 per cent, it still exceeds the BoE’s target rate by more than 1 percentage point. ¬†As a result, consumers are actually losing money in their savings accounts due to the high rate.

UK inflation slowed to 3.1% last month from 3.2% in June, marking the third consecutive month in which prices have been slower to rise than expected.

Mervyn King, Governor of the Bank of England, for the third time in the last 8 months has had to resort to penning an explanatory letter to the chancellor of the exchequer describing exactly why the target inflation rate has been missed once more.

In his missive, the governor described the BoE’s Monetary Policy Committee’s surprise at how strong the inflation rate has remained in light of the several temporary issues that were influencing its growth.

Among these issues is VAT returning to its higher 17.5 per cent rate, 2.5 per cent higher than it had been throughout the economic downturn; import costs rising due to an erosion of the worth in the pound which occurred in the middle of 2007, and recent oil price hikes.

Mr King was quick to add in his letter that probabilities are high that this one would not be the last, saying that subsequent months may very well bring additional explanations for the persistently high inflation rate.

The BoE commented recently that in light of the rise to 20 per cent in VAT, which goes into effect January of next year, inflation rates will be very likely to remain much higher than the initial forecast for the next few months, yet Mr King did stress the likelihood of inflation falling below the 2 per cent target by 2012.

Those consumers with savings accounts are finding it a struggle to earn a high enough interest rate in order to avoid the destruction of those same funds at the hands of high inflation.

Even fixed-rate bonds, the financial products which characteristically carry the most attractive interest rates, cannot offer to offset the high inflation rate.

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