[an error occurred while processing this directive]
BBC News
watch One-Minute World News
Last Updated: Tuesday, 17 April 2007, 11:05 GMT 12:05 UK
Q&A: High inflation and you
UK inflation is soaring, consumer prices are rising by 3.1% - and the Bank of England has some explaining to do, as for the first time it has allowed inflation to stray beyond the government's target range of 2% plus/minus one percentage point.

But how will inflation affect the UK economy, and is it here to stay?

How will the rate of inflation affect me?

model brick house with money stacked next to it

Well, there is the impact that you have already noticed: you are paying more in the shops.

But obviously there is more to it. The Bank of England has a duty to keep inflation in check, and its main tool is interest rates, currently at 5.25%.

That's a fairly blunt instrument, though, and it can take more than a year for interest rates to have an impact on inflation.

Nonetheless, the bank is expected to raise rates yet again in May.

And while this may take some time to cool down inflation, it will have a more immediate impact elsewhere in the economy.

I know, my mortgage payments will go up yet again...

Unless you have locked in a low mortgage rate, then you are very likely to see rates rise yet again - although experts are divided by how much.

A rise of at least a quarter percentage point this May - to 5.5% - is widely expected, and some analysts believe rates could reach 6% by the end of the year.

If rates go up that sharply, it will have an impact on the UK property market.

But don't bet on house prices to crash.

Yes, first-time buyers and low earners are finding it increasingly difficult to afford their own property. Some people may see their homes repossessed.

However, the UK is very densely populated and the amount of new supply of housing stock coming onto the market falls far short of the demand.

As a result, chances are that prices will not drop sharply but either slide or move sideways.

Surely my boss will have to raise my wage, though?

Yes, and it should be by more than 3.1%. Wages and benefits are pegged not to the Consumer Prices Index but the Retail Prices Index, which includes housing costs and currently grows by 4.8%.

We haven't seen such high RPI inflation since 1991.

Whether you will be better off is a moot point, though. Remember: most of what you get more in your pay packet will be eaten up by inflation.

But my job is safe, isn't it?

Tricky question. Until now, UK plc has coped well with higher interest rates.

Don't forget, rates are still well below the levels seen in the early 1990s.

But higher interest rates are pushing up the cost of both debt and investments, which could hurt some companies.

And they boost the value of the pound against the US dollar. This is a double-edged sword, as it helps to keep down the price of energy (which tends to be priced in dollars), but hurts companies exporting to the US.

Will we see a return to high inflation and high rates, then?

That's unlikely. As mentioned before, it takes time for higher interest rates to bite.

And energy prices are coming down too, especially for household energy like gas.

As a result the inflationary pressures are likely to ease over the summer.

A lot, however, depends on pay negotiations during the next few months. If employers and workers agree pay rises well above inflation, prices could go up yet further.

The members of the Bank of England's rate-setting Monetary Policy Committee will be watching like hawks for price signals just like that.


RELATED INTERNET LINKS
The BBC is not responsible for the content of external internet sites



FEATURES, VIEWS, ANALYSIS
Has China's housing bubble burst?
How the world's oldest clove tree defied an empire
Why Royal Ballet principal Sergei Polunin quit

PRODUCTS & SERVICES

Americas Africa Europe Middle East South Asia Asia Pacific