Inflation increase pushes consumers deeper into debt

Inflation increase pushes consumers deeper into debt

The inflation rate rose to 4.5% in August, according to the latest figures from the Office for National Statistics.
The main contributing factors included rising utility bills, higher food and clothing prices.

The rate increased from 4.4% in July and the Bank of England expects the Consumer Price Index to rise to 5% before the end of the year.

This is grave news for consumers as the cost of living soars, plummeting UK households further into debt.

Wages are not rising in line with inflation though, which leaves consumers with less to spend and more debts to cover.

The price of clothing and footwear increased at the fastest rate on record (3.7%) for the July to August period.

The end of the summer sales and introduction to autumn prices saw female clothing increase more than male or children’s wear.

Furniture and home goods also experienced a price rise, from 2% between July and August compared with a 1 % rise a year ago.

The biggest annual rise in the water and energy bills in more than two years has also pushed up the rate of inflation.

Gas and electricity prices from 5 of the “big 6 “energy suppliers have risen by around 20%, adding between £150 and £200 to the average annual fuel bill.

The inflation rate is now double the Bank of England’s target rate of 2%, with little sign of returning to the target rate soon.

The increased rate of inflation will have a detrimental effect on the pockets of cash-strapped Brits.

New research from Alliance Trust Savings found that 65-74 year olds are the age group which will suffer the highest inflation rate at 5.4%, which is the fastest rate of price change since October 2008.

Those under 30 face an inflation rate of 4.9%, which is the highest rate to face people in this age bracket since September 2008.

Mounting debt prevents Brits from saving

Kevin Mountford, head of banking at moneysupermarket.com, commented on the increased cost of living, “Basic rate tax payers now need an account paying at least 5.63 per cent just to preserve the value of their savings, rising to 7.51 per cent for higher rate tax payers and a staggering 9.01 per cent for savers paying the top rate of tax. Currently no savings accounts pay enough to offset the damage done by inflation.

“While most savers won’t be able to secure an inflation beating product, it is still vitally important they check their rates and be prepared to switch if they are not on the most competitive deal. The difference between the average and top paying rates is considerable, so moving to a better deal can go a huge way in helping savers limit the impact on their pots.

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Inflation rate hits 20 year high

Inflation is at its highest rate for 20 years, according to figures from the Office for National Statistics (ONS).

Retail Price Index inflation (RPI), which includes mortgage interest payments, rose to 5.5 per cent from 5.1 per cent in January,its highest level for 20 years.

The UK Consumer Prices Index (CPI) annual rate of inflation has risen to 4.4 per cent, up from 4 per cent in January.

This was driven by higher food, fuel and clothing costs and was at the highest level for more than two years.

Domestic heating costs, particularly gas, rose by 0.4 per cent on average between January and February, despite falling by 2.8 per cent a year ago.

Clothing and footwear prices have  also risen, where overall prices have shot up by 3.6 per cent following the January sales.

Overall transport costs rose by 0.8 per cent between January and February, pushed up by a 1.4 per cent increase in pump prices, following rises in the price of crude oil.

The CPI measure has now been one percentage point or more above the two per cent target for 15 months.

The CPI figure is the highest since October 2008, and will put pressure on the Bank of England to lift interest rates to curb accelerating inflation.

Other contributing factors included rising domestic heating costs, an increase in financial services costs as well as the higher cost of books and toys.

However alcohol and tobacco prices fell by 1.1 per cent - a record monthly fall - compared with 0.4 per cent a year ago. This follows a record monthly rise of 4.6 per cent between December 2010 and January 2011. Spirits fell by 5.8 per cent.

The overall increase in CPI to 4.4 per cent was more than had been forecast by economists.

Analyst Hetal Mehta, of Daiwa Capital Markets, told the BBC: “This pressure will no doubt intensify as higher commodity prices feed through in the coming months, taking inflation to around five per cent.”

However she suggested that a rise in interest rates should bring the rate of inflation under control.

"Provided that interest rates start to increase by 25 basis points (0.25 per cent) per quarter from August, in line with our expectations, then we believe inflation will average two per cent next year," she added.

The next publication is due on April 12.

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Cost of raising a child outstrips inflation

The cost of raising a child has rocketed to £210,000 according to research from the insurer LV=.

The amount parents spend on their offspring to the age of 21 has risen by 4.5% over the past year, ahead of the current rate of inflation which currently stands at 4%. The figure is up by 50% or £70,450 since 2003 when LV= first carried out the report.

Over the course of a year, the figure breaks down to £10,040 annually, £836 a month or £27.50 a day.
Childcare and education costs remain parents’ biggest area of expenditure costing £67,430 and £55,660 respectively over an offspring’s childhood. LV= do not include the cost of private education in the annual study but do cover school uniforms, after-school clubs and university tuition fees. Costs in this area have risen by 5.3% over the last year and are likely to increase considerably in 2012 when universities will be allowed to increase fees.

Despite the increase in tuition fees, 35% of parents remained hopeful that their children will go on to university but admitted that they would have to make cutbacks to meet the cost involved.

LV= spokesperson Mark Jones said: “Parents are all too aware that having a child comes with a hefty bill when you factor in things like childcare, schooling and holidays over a 21-year stretch.

“Childcare and education must feel like another mortgage payment for some parents, as this is still the biggest outlay and shows no signs of slowing down, particularly when many universities are set to increase tuition fees, up to £9,000 a year, from 2012. Despite this, I don’t think any parent would begrudge any spending on their children.”

Parental spending throughout a child’s first 21 years breaks down as follows:
1st year: £9,491
Years 1 to 4: £53,586 (£13,397 a year)
Years 5 to 10: £56,856 (£9,476 a year)
Years 11 to 17: £47,820 (£6,831 a year)
Years 18 to 21: £43,094 (£14,365 a year)
Total: £210,849

The average child will consume £18,581 worth of food up to the age of 21 and will cost its parents around £10,000 in hobbies and toys. Pocket money comes in at £4,543 while personal care and grooming accounts for £1,164 of the total amount spent to adulthood.

Some 78% of parents said they are actively making cutbacks to cope with financial pressures, according to the Cost of a Child Report. Financial worries have caused 39% of parents to cut back their savings and 30% to cancel or review their insurance products.

“We have all considered short-term measures to stretch the family budget and try to save money. But with 14% of parents saying they have made cuts specifically to their life, health, or unemployment cover, people could be leaving themselves and their families at risk,” said Mr Jones.

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