Tuesday, 22 March 2011

No change budget predicted

CPI inflation 4.4%, RPI inflation 5.5%

This is a graph showing Annual inflation rates - 12 month percentage change
Annual inflation rates - 12 month percentage change

Inflation continues in its upward spiral. The CPI annual inflation – the Government’s target measure – was 4.4 per cent in February, up from 4.0 per cent in January and is the highest point reached in 28 months. This will put pressure on the Bank of England to raise interest rates. 

The inflation target set by government is 2 per cent and this has caused Mervyn King to put pen to paper to explain to the Chancellor the reason why the target is not being met. 
That pen will again be out as a result of today's figures, explaining that domestic heating costs, soaring oil prices and clothing and footwear where prices, overall, rose by 3.6 per cent following the January sales, all contributed to the inflation target being exceeded.

Whilst only three members of the Bank's nine strong monetary policy committee voted for an interest rate hike to damp down on price rises last month it is unlikely that they will remain in the minority for much longer. Higher interest rates are coming sooner rather than later.

The RPI index, which is the measure of cost of living used in striking a wage bargain
was also 5.5 per cent in February, up from 5.1 per cent in January. So not much doubt what the  benchmark for the pay deals  will be this next year.

But if this wasn't bad enough for young George, the Office of National Statistics dealt him another blow.  They produced the latest figure on public sector net borrowing.  This figure was £10.3 billion, a figure a lot higher than that expected by his friends in the City. they were expecting the figure to be nearer £8 billion.

In the light of these two set of economic indicators, what then can we expect from the Chancellor in his budget tomorrow?

The figures gives him little scope to prepare  a goody bag for us all. There will be very little in the coffers for budget giveaways. 

The budget will be a very cautious package, what he gives with one hand, he will take with another.

His fiscal stand will have to be tough if he is to prevent too large an increase in interest rates in the months to come. 

For his dilemma is this. If the private sector is to expand, and it needs to expand to mop up the increased unemployment caused by cuts in the public sector, he must maintain low interest rates. But the inflation figures make this much more difficult to achieve.

So tomorrow's budget can be summed up in those immortal words of Frankie Howard, "Woe, woe and thrice woe."

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