The Consumer Prices Index (CPI) rate of inflation surged to 3.7% last month.
This abnormal rise is attributed to surging food costs that were nudged up by weather disruptions in December 2010, rising energy bills and ever increasing petrol and diesel prices. As per the Office of National Statistics (ONS), the rise in CPI of 1% between November 2010 and December 2010 is the biggest monthly rise since records began in 1996.
The current rate of inflation at 3.7% is almost double the 2% target that Bank of England is tasked with. As per the policy makers at the Bank's Monetary Policy Committee (MPC), such a spike in the inflation rate is due to temporary factors, such as spikes in commodity prices and January's VAT rise from 17.5% to 20%.
If the inflation rate persists, it undoubtedly has a two fold detrimental impact on the economy. Firstly, increased costs to run businesses and secondly, risk of base rate going up from its current 0.5%, which will lead to increased borrowing costs. Compounded to these, employees would rightly ask for increased wages to sustain the increased cost of living.
Most of the businesses in the UK are just coming to terms with the gripping recession and are very precariously placed. Any negative impact would mean hundreds of businesses, especially small to medium ones may find it very difficult to survive. David Cameron yesterday admitted he was concerned by rising inflation in the UK. Although about 19 businesses pledged to create as many as 40,000 new private sector jobs this year, most of them in the retail sector, all these plans may be deferred or shelved if inflation continues to remain at current levels.
Kesh Thukaram, Director Best Insurance stressed on the need for employees to be proactive and take responsibility for their income and cash flows. He added that ultimately if businesses come under pressure, they will have no option but make hard decisions in terms of costs. In the service sector, on average more than 60% of costs for any business is people and hence not the time for anyone to be unrealistically bullish or complacent. The number of people buying redundancy insurance, payment protection insurance is on the rise. We have had a very busy start in the New Year and that is likely to remain for the foreseeable future.
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