Sunday, October 23, 2016

Inflation: next year's ticking time bomb

The last time sterling fell off a cliff we were in the midst of global financial crisis from 2007 to 2008. The currency shock sent inflation shooting up to 5.2pc, abruptly squeezing on real living standards.
On that occasion the poor were at least protected. Benefits and in-work tax credits were indexed to inflation. Social cohesion was preserved.
This time the most vulnerable families will take the brunt as the cost of imported food, clothes, and fuel suddenly jump. A parting gift of the last Government was to freeze benefits for 11.5 million households until 2020.
This is a political time bomb that will detonate next year when the inflation ‘pass-through’ from imports bites in earnest. It threatens to poison the already fractious national debate unless steps are taken to mitigate the damage.
The Institute for Fiscal Studies estimates that the freeze was going top cut these benefits by 4pc even before the slide in sterling, but this will now be 6pc based on the deteriorating picture for inflation.
The poorest 8.3 million families will lose an average of £470 a year by 2020, and many will suffer further losses from the effects of universal credit.
“The rise in the minimum wage will help some people but beyond that the only way to compensate those on benefits is to increase those benefits in line with inflation,” said Paul Johnson, the head of the IFS. READ MORE