December saw inflation rates in the UK soar by an full percentage point, up from 1.9% in November to 2.9% in December. At the end of the month of December the UK government changed the VAT rate from the interim reduced level of 15% back to the previous 17.5% rate. A small rise in expenditure on the face of it, but over all, taking all VAT chargeable items into account, that jump together with the claims that several major retailers quietly increased prices by more than the formal rise in VAT means that it is almost definite that prices have gone up further still in January.
So what level will that leave the January inflation numbers showing? No doubt, no less than 3.0%, possibly well over 3.0%.
Does this mean that UK inflation figures are charging away out of control and what does it imply for the regular citizen? Well, loads of big lending banks are having to put up their standard variable rate mortgage rates. Why is this the situation if interest rates are fixed and their lowest on record? The answer is reasonably plain. The banks must appeal to a load of new savers and in a large number of cases they can only attract them by offering decent savings interest rates. Savers prudently investing in accounts paying 0.5% are losing a small fortune when the inflation figure is racing towards the 3.0% mark. In actual terms, they are in reality losing 2.5% of their hard generated investment by keeping their cash sheltered away in the bank.
So, these cautious savers are having to look around vigilantly and with promising government backed savings and recently rescued banks being able to afford to pay out higher interest rates, other banks must raise the cash to follow suit. And there is only one straight forward way of doing this - raising the basic interest rates that they are charging their borrowers who have been the beneficiaries of record low rates for a long time.
This sudden and sudden rise in the standard variable rates along with the pound's gradually rising revitalization on the important international money markets may well just be the prompt that the controlling Bank of England's monetary policy committee may see as the incentive to start to raise the base rate bit by bit after months of stagnation. They might want to manage expenditure whilst having to guard the wealth of savers from losing out on their valuable investments. Their only tool for controlling this would be to increase the base rate bit by bit.
A number of observers think that the expected base rate increase must come at some point in the future and that if it is sooner rather than later, it could reduce the eventual grief of the interest rises. They fear that if the interest rates are not raised in the near future, then they might have to raise a lot more in later months. Only time will tell.
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