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Inflation in rise shocker as markets rumble

London, UK (13/09/2011)

LONDON (Management Today) Inflation has gone up to 4.5% - no surprise there, although it didn't do many favours for the markets.

Caloo, calay – and we say that with one eyebrow firmly raised, because the consumer price index, the UK’s measure of inflation, has risen for the second time in a row, to 4.5%. According to figures from the Office of National Statistics, that’s down to a combination of factors, including the cost of clothing and footwear, which rose by 3.7%, and high petrol prices, which rose by 0.9%, despite a well-publicised price war between supermarkets. If you think that’s bad, check out the retail prices index (which includes the cost of housing): that rose from 5% to 5.2%. On top of the turmoil in Europe, it has all the makings of the dreaded double-dip. So you can’t blame the markets for reacting badly…

Of course, this is all part of the Government’s grand plan – it expects inflation to keep rising until the end of the year, when the effects of the VAT rise at the beginning of the year, increasing utility bills, high food and oil prices and the depreciation of sterling should start to wear off. That said, with energy costs and train fares all set to increase over the next few months, there’s going to be even more pressure on people’s wallets. So we’ll have to wait and see whether inflation begins to fall back of its own accord.

All eyes, then, on the Bank of England’s Monetary Policy Committee, the body responsible for determining interest rates. Rates have been kept at a record low of 0.5% for as long as anyone can remember (admittedly, economists have short memories) – but there was some indication of a rate rise to come (thus theoretically pushing back inflation) earlier this summer, when three of the committee’s nine members voted for an increase. That’s looking increasingly unlikely, though: what with weak growth and high commodity prices (which higher inflation would have no effect on), the perception now is that the economy might be too fragile to withstand higher interest.

So it’s no wonder, really, that following a brief rally this morning, markets are in a bit of a fragile state, too. After whispers that China is sniffing around Italy’s debt saw the FTSE rise by 0.7%, fears that Greece is finally about to default took care of that, pushing it back down by 0.6% to 5,100 points. The fear is that if (or, more probably, when) Greece defaults, it may have to leave the Euro, thus sparking a sort of domino effect of economic disaster across the rest of the region.

German chancellor Angela Merkel sought to calm things, telling a local radio station she wouldn’t allow Greece to go into ‘uncontrolled insolvency’. Although whether Merkel et al have the power to control it is another question altogether. 

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