Inflation

Inflation affects us all, one way or another. It lowers the value of money, and it's key to the cost of cash – otherwise known as the level of interest rates.

Britain's headline consumer price index (CPI) inflation is now rising at 4.8% a year, more than twice the Bank of England's 2% target. Meanwhile, the older-style RPI inflation – the Retail Price Index, which includes housing costs – is running at 5.2% a year.

So is a climbing cost of living turning into a major problem for the UK? Before inflation really sets in, there are always early warning signs. 

You can read in detail what each indicator suggests for UK inflation – and for some, the bank rate too. But to summarise, external factors such as soaring oil and food prices, and price pressures in China, are already doing some inflation damage. That's showing through in the BRC Neilson shop price index. 

British industry is having to charge more for its products, so factory gate prices, which end up influencing what the consumer pays in the shops, are moving up. The latest CBI survey, in contrast, suggests manufacturing price pressure could be easing, though we need further confirmation on this next month. And another warning sign that isn't glowing amber or red as yet is wage inflation.

One final comment. If the UK's bank rate (what we all used to call 'base' rate) rises, mortgage rates won't be far behind. That could mean higher mortgage payments for millions. In other words, RPI is about as high as it's been compared with the Bank's core interest rate since 1980. For how long can this continue? Source: Moneyweek