5.2% Inflation – Is it the Peak? By Melanie Taylor At Isnare.com Ezine Articles

In September, inflation reached 5.2% - the highest for 16 years. Fast-rising prices of energy, food and housing have had a serious impact on consumer finances over the past year – and many analysts argue that the real rise in costs of living to the average British citizen is even higher.

As a result, increasing numbers of people are facing the prospect of falling into debt. According to energy watchdog Consumer Focus, the number of homes currently in fuel poverty (in which households spend more than 10% of their total income on energy for their homes) could be as high as five million.

However, there may be some respite on the horizon. Economists believe the signs are there suggesting inflation may be about to come back down, and the 5.2% rate of inflation for September may represent the peak.

Why could this be the peak?

The main reasons for the fast-rising inflation Britain has experienced are external factors – namely prices of foreign oil (mainly affecting petrol), natural gas and food, all of which are loosely connected in terms of price.

Prices of all three have risen sharply in the past year, for various reasons – short supply, high demand and political reasons to name three – but due to levels of demand being hit by increasing economic uncertainty, it is looking as though prices may be about to come down again.

Statistics also show that demand for domestic consumer goods and services is also shrinking, with many consumers cutting back on spending, and increasing numbers of consumers shopping with budget retailers instead of their regular stores. Ultimately, this kind of consumer behaviour should lead to reductions in prices, as retailers aim to compete with each other.

What would it mean for consumers?

It’s unlikely that prices on the whole will reduce – which is known as deflation, and could in fact be bad for the economy – but, more likely, prices may begin to settle and we may see less of the rapid price rises we have experienced in the past year. In general, this would lead to a more stable economy.

Imported commodities such as oil, gas and food may well become cheaper, as lower wholesale costs would enable retailers to make similar profit margins at much more competitive prices.

A spokesperson for Think Money says: “A slowing in inflation would not have an instant impact on consumers, since prices of many things would still be quite high relative to a few years ago. But since prices of fuel and energy appear to be coming down now, people might find they are better able to afford their costs of living in the next few months.

“However, there are still a lot of people being pushed into debt by high prices, and that is not something that slowing inflation can solve. We advise anyone struggling with debt to seek expert debt advice as soon as possible.

“There are a range of debt solutions available, including debt consolidation, debt management plans and IVAs (Individual Voluntary Arrangement) – all of which could help you repay your debts and get your finances back on track.”

Is inflation guaranteed to slow down?

In the short term, no. We could continue to see rising inflation for some time yet if the economy does not behave as expected.

Again, the main factor is imported fuel and food. Our Government have little control over these prices – and if there is an unexpected shortage in supply or surge in demand for either, prices may continue to rise.

How well financial institutions respond to the Government’s banking bailout plan may also affect inflation. If more lending does not occur, businesses reliant on credit may find themselves short of funds – and those that survive may be forced to raise their prices to compensate.

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