Inflation
Recent inflation has been higher than expected, and has now been above the government's target rate of between 2-3% for two consecutive quarters despite low economic growth. The Consumer Price Index (CPI) shows that prices increased by 3.7% in the 12 months to April 2010. The Retail Price Index (RPI), the broader measure of inflation which includes housing costs and on which pay negotiations are usually based has reached 5.3%, the highest since July 1991 [1] The larger than expected inflation has largely been driven by increases in the cost of fuel, food and clothing - in part caused by the falling exchange rate which has made imports more expensive. The increase in the VAT rate back to 17.5% also had some impact. Despite this, because of the weak economic outlook, inflation is expected to fall back below 3% by the end of the year[2], and some economists continue to warn of the risk of deflation - when prices fall and consumers delay their expenditure, which would threaten the economic recovery.
What are the implications?
- As these inflationary pressures are viewed as short-term, interest rates are likely to continue to be held low by the Bank of England to stimulate spending and lending.
- As inflation falls back costs will rise more slowly, easing the pressure on budgets.
However, if inflation continues to exceed expectations:
- There may be a decline in industrial relations as workers demand pay settlements that reflect the increased cost of living, whilst the employers and in particular the government attempt to freeze pay to reign in costs.
- The BOE may feel it necessary to raise interest rates to tackle inflation - potentially slowing the rate of economic recovery.
- People on fixed incomes may struggle as a result of increasing food and fuel prices.
- The combination of higher than expected inflation and low interest rates may hit people who rely on interest on their savings.
- The value of charity donations may be eroded by inflation as people continue to give in round multiples of £5 or £10.
Moving forward
- How will you approach your next salary review in your organisation in light of the current inflation figures?
- How will your beneficiaries be impacted by inflation - should you try and do more to help people on fixed incomes?
- Could you do more to persuade your donors to increase the amount they donate so that their gifts keep pace with inflation?
- Are you seeing savings in some areas of your budget due to low inflation? In challenging financial times, how should you use this money? Is it possible to boost your reserves if needed, or do you have other pressing demands?
Inflation is closely related to interest rates. If higher interest rates would have an impact (negative or positive) on your organisation, have a look at this driver to help you think through the implications.
Want to know more?
Published by: Office for National Statistics
Date:Monthly
Format:Web
What is it? An up-to-date monthly summary and chart showing how both measures of inflation (CPI and RPI) have fallen since the past year.
How useful is this? This provides a good overview of the different pressures affecting inflation from a reliable source.
Other comments:
Published by: HM Treasury
Date: Monthly
Format: PDF
What is it? Monthly smmaries compiled by the Treasury which compare and contrast independent forecasts of key economic indicators for the next year to two years, including inflation.
How useful is this? With many contradictory predictions in the press, this brings together a range of respected forecasts and provides a good overall view of where inflation is heading. The summaries contain detailed tables of data forecasts with the averages collated in easy-to-read charts. The forecasts do not provide any new information on Treasury's own views and no significance should be attached to the inclusion or exclusion of any particular forecasting organisation which is subject to review.
Other comments: The August 2009 forecast contains forecasts until 2013.
What impact does inflation have on charitable giving?
Published by: NCVO / CAF
Date: May 2010
Format: PDF
What is it? A briefing paper discussing the impact of inflation on the value of gifts and planned giving.
How useful is this? The paper provides a good overview of how inflation can erode the value of gifts over time, which may help charities understand the cost of inflation.
Published by: Financial Times, a national broadsheet with no strong political bias
Date: May 2010
Format: Web
What is it? This article discusses the higher than expected inflation, as measured by the Consumer Price Index, and the UK inflation outlook
How useful is this? This article may be of use in exploring the broader economic context.
Other comments: The Financial Times only allows access to ten free articles per month
References
- Inflation statistics, Office of National Statistics (ONS) [back]
- Bank of England inflation and GDP projections [back]
Discuss
How will this affect your organisation? Have you considered it during your strategic planning? Can you share any interesting relevant links?
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