December saw inflation rates in the UK bound 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 costs on the face of it, but over all, taking all VAT chargeable items into account, that jump together with the claims that lots of major shops silently increased prices by more than the official increase in VAT means that it is almost assured that prices have gone up more still in January.
So what level will that leave the January inflation figures showing? No doubt, at least 3.0%, maybe well above 3.0%.
Does this mean that UK inflation figures are racing away out of control and what does it imply for the average person? 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 level and their lowest on record? The answer is rather simple. The banks must attract masses of new savers and in a lot of cases they can only attract them by offering decent savings interest rates. Savers carefully investing in accounts paying 0.5% are losing a small fortune when the inflation figure is charging towards the 3.0% mark. In actual terms, they are truly losing 2.5% of their hard earned investment by keeping their cash locked away in the bank.
So, these cautious savers are having to look around warily 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 simple 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 unforeseen rise in the standard variable rates along with the pound's slowly emerging recovery on the important international money markets may possibly just be the prompt that the controlling Bank of England's monetary policy committee may see as the basis to start to raise the base rate gradually after months of stagnation. They might want to manage spending whilst having to watch over the wealth of savers from losing out on their important investments. Their only tool for controlling this would be to increase the base rate at a snail's pace.
A few observers think that the anticipated base rate raise must come at some point in the future and that if it is sooner rather than later, it could decrease the ultimate sting of the interest rises. They dread 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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