Unless there is a major adverse event in the UK in the coming months economic experts have said that they expect UK inflation to be at its peak now. It is expected that throughout the early part of next year there will be a significant decline in inflation rates as recent discussions between Mervyn King and George Osborne have suggested that inflation would be returning to its 2% target. It is not all good news however, as inflation in some sectors is still on the rise.
The amount of real income that the population has is at its lowest point since the early 1980s and this is having a significant effect on the amount people are spending in shops. There are price wars taking place on the high street and the Internet encouraging people to spend more money. Retailers are very concerned that much of the stock is going to be left over as people stop spending money, this has led to significant pre-Christmas sales taking place.
Despite the return of inflation rates to normal levels it is expected that the price of goods in 2012 will still rise ahead of the amount people are earning. However, throughout the year it is expected that the gap between the two figures should become much smaller. It is expected that by 2013 inflation-adjusted wages should begin to rise.
Many analysts have said that they suspect that the increased inflation has been one of the main reasons why economic activity has slowed down in the past year and a half. The reason for increased inflation has been largely because of the increasing VAT increase that took place in January and more expensive energy bills. These factors are said to significantly outweigh the Eurozone crisis in what is causing the U.K.’s economic problems.
The type of inflation that has been occurring recently has not benefited the population. Normally, when inflation figures are high, people see the value of their house increase which means the value of the debt is less. However, house prices have not risen so people’s debts are just getting larger.
In fact, recent figures released by the government have shown that house prices have fallen since last September. House price values have fallen by an average of nearly 1.5% compared with last year and if you account for the cost of living during the same period the fall is actually significantly larger at 6.6%.
All of this means that consumers have less disposable income and they are tending to focus on paying off their debts rather than increasing them. This has meant that retailers have suffered significantly and their problems have been compounded by the Eurozone crisis. It is expected that even with inflation falling the demand is going to remain weak for quite a while to come. In the next few months it is expected that inflation is going to come down significantly, but whether than actually happens remains to be seen.