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June 17, 2008

UK Consumers Feel Inflation’s Squeeze

I have a loan to repay (yes, count me in!)… in euros. So, while I can afford to spend some time watching the direction of the ever-changing cross currency rates on a daily basis, the bad news is that I will not be able to afford the loan itself. Only yesterday, the pound dropped almost one percent to euro and 0.8 percent to US dollar.

The pound keeps falling both against the euro and the dollar, and Mervyn King says he is “concerned about the present and prospective period of above-target inflation”. Me too, Mervyn, me too… The falling pound means that as prices go up, our purchasing power and the value of our money goes down, if not deeper underground.

Something is going up though, and that’s the inflation rate which has reached its highest level, straying more than one percentage point higher than the initial government set target of 2pc. What will happen next? If increases in the cost of food (especially meat and vegetables), oil/fuel, mortgages, utility bills, and other household bills (including council tax) persist, it is very likely that inflation will rise further in the second half of the year, and even go beyond 4 per cent.

Meanwhile in the real world, where real people buy real products and services, UK inflation is well beyond ten percent and as real take-home pay shrinks, the financial squeeze comes in, which will in turn be reflected in our pockets.

More bad news for travellers and foreigners is the rising cost of foreign holidays adding extra inflation pressure in the already and since King shatters the water without adding a single glimpse of hope in his statement, I feel the need to take a stand. So, my advice to those of you that were thinking of taking a break away from the UK is to hurry up before it becomes another midsummer night’s dream, just like the first property utopia.

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