Inflation in the UK is hindering the household budgets as it has climbed to a four-year high since the Brexit vote. When the pound fell sharply after the vote, the economy started to suffer. In May of this year inflation rose to 2.9%, above the 2.7% that was expected by economists. Inflation has been steadily increasing since the referendum result a year ago, which triggered a sharp drop in the value of the pound and pushed up the cost of goods imported from abroad. Inflation was 0.3% in May 2016, a month before the Brexit vote. That´s a growth of 2.6% in inflation in just a year.
While higher prices for oil have added to the upward pressure of inflation, it really comes down to the weak pound. UK households are seeing higher prices for food and electricity, leaving less to spend on travel and non-essential purchases. As manufacturers are being hit by the weak pound for purchasing goods from overseas, the price rise of their goods for production will mean higher prices for consumers. It appears to be a catch 22, as wages are not keeping up with inflation which leads to the inability to purchase goods that, in turn, help the economy to grow and for inflation to lessen.
There is movement to pressure the newly elected government to help households cope with rising living costs. The TUC general secretary, Frances O’Grady, said “The election showed that working people are struggling. And the biggest price rises in four years won’t provide any comfort.” She also stated that “Working people are still £20 a week worse off, on average, than they were before the crash, and now rising prices are hammering their pay packets again. The new government must stop the real wage slide. Ministers must focus on delivering better-paid jobs all around the UK.”
“Too often there is more month than money left after pay day. Ending the public sector pay freeze and making sure all workers are paid a decent wage is an absolute must and it needs to be on the agenda for the Queen’s speech. Tim Roache, general secretary of the GMB union said. The average wage growth of 2.1% in March is not keeping up with inflation and the inflation increase is expected to widen the gap even further.
The Brexit negotiations are hindering the UK´s ability to shrink the gap between inflation and wages and will continue to do so until everything is settled but that is a long way off. Even interest rates are being affected. The Bank of England is keeping the rate at the record low of 0.25%. Oliver Kolodseike, a senior economist at the Centre for Economics and Business Research consultancy, said: “Under normal circumstances, the Bank of England would have a sufficient set of arguments to justify an interest rate rise. “Under the current circumstances of high inflation and low wage growth, increasing interest rates would only harm consumers further, as they grapple with trying to pay their mortgage and rising bills.
Minimal growth in wages, big growth in inflation, and a weak pound, have all led to a lag in consumerism and the end is not in sight. Paul Hollingsworth, a UK economist at consultancy Capital Economics, is predicting an even higher inflation rate, at around 3.2% in the fourth quarter of this year. This is due to the forecast in costs of production and the price increases feeding down through to the shops and the consumers. All of the UK is in a standby position, holding their breath so to speak, to wait and see what happens once the UK leaves the EU.