Five per cent inflation threat outlined

In a week when Consumer Prices Index (CPI) inflation was revealed to have passed the four per cent mark, it may be far from reassuring to those struggling with debt to have to deal with even higher price rises.

However, the Bank of England confirmed in its Quarterly Inflation report today (February 16th) that it expects such a rise to take place.

The body stated: “CPI inflation is likely to pick up to between four per cent and five per cent in the near term and to remain well above the two per cent target over the next year or so.”

According to the bank, the main – but not sole – driver of this in the short term will be VAT, which is good news in one sense as the effects of the recent hike will work their way out of the system in 12 months.

However, other upward pressures like rising food and fuel costs were noted and the Bank said there was a high level of uncertainty about the medium term, with an acknowledgement that Monetary Policy Committee members differ in their predictions.

If this rate of price growth continues, one consequence may be many people in debt struggling more than ever to pay off what they owe while meeting other bills. As a result, some may need an individual voluntary arrangement to deal with an otherwise unmanageable financial situation.

However, mortgage holders worried about possible repossession may take heart that the report does not strongly hint at major rate rises, according to Royal London Asset Managament economist Ian Kernohan.

The expert said it did “sanction” a hike, but not a large one, “as it is unlikely that the economy could sustain a significant tightening in monetary policy”.

By Joe White