Recession fears grow along with rising inflation

22 July 2008 / by Daniela Gieseler
Recent news that inflation ran as high as 3.8 per cent might have come as a shock, but for the middle classes this figure is nearly double the national rate, the Daily Telegraph/Capital Economics Cost of Living Index has revealed.

In June inflation for the middle classes, whose spending on education, fresh food, fuel, gas and electricity is proportionally higher than that of the average consumer, reached 7.4 per cent and outstripped any increase in salaries for the first time since 1995.

The figures are based on the Consumer Price Index (CPI) which measures the prices of 650 different goods and services. The Cost of Living Index then splits the CPI, in order to give a more balanced reflection of what different consumer groups are experiencing.

Pensioners are currently facing an inflation of 7.2 per cent and will be hit much harder by rises in energy bills as they tend to spend proportionally more income on keeping their homes warm.

Due to the escalating oil prices many energy providers such as Centrica, the owner of British Gas, have predicted further gas price increases of up to 70 per cent, which might cause many retirees to end up in fuel poverty – spending 10 per cent or more of their income on gas and electricity.

Gordon Lishman, the director general of Age Concern, estimates: "Price rises on this scale would mean well over three million pensioner households – more than one in three – would be in fuel poverty.

"It is totally unacceptable that because of price hikes many older people may feel forced to cut back on their heating, which could put their health at risk," he concluded.

In an attempt to keep inflation down, the Bank of England has so far resisted any demands for cutting interest rates, having voted to maintain the official Bank Rate at five per cent earlier this month.

This decision has met with considerable criticism, including recent comments of Professor David Blanchflower who is himself a member of the Bank of England's Monetary Policy Committee (MPC).

Mr Blanchflower, who has been voting for interest cuts for the last nine months, warned: "I think we are going into recession and we are probably in one right now. We will probably have three or four quarters of negative growth but the risks are to the downside."

Although a cut in interest rates might lead to an immediate rise in inflation, he urged his colleagues to look at a longer-term picture: In order to keep recession at bay it might be well worth putting up with a higher inflation, which he predicts to go down in the short-term.

Pointing out the recent reports about the slump on the property market, Mr Blanchflower predicted that house prices will fall even further by up to 30 per cent. He also believes that unemployment rates will increase by one or two percentage points after recent announcements of redundancies.

Calling his colleagues to take action, he said: "It's not too late to stop it but we have to act right now. Monetary policy has been far too tight for too long. We can't just sit and do nothing as we have done for too long."

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