Wages crushed as inflation set to rocket again

Tim Wallace
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HARD-PRESSED workers took another blow in August as inflation stayed persistently above wage rises for the 27th consecutive month.

Economists fear inflation will jump yet again towards the end of this year and could even hit three per cent again in 2013, increasing the pressure on household budgets even further.

Consumer price inflation came in at 2.5 per cent in the year to August, down a touch from the 2.6 per cent seen in July but still firmly above the Bank of England’s two per cent target.

That is well above the 1.5 per cent increase in average wages recorded in July, the most recent month for which data is available. Inflation has outstripped wage growth since April 2010.

The cost of living rose 2.9 per cent on the retail price index, compared with 3.2 per cent in July, and when tax changes are included the tax and price index rose 2.5 per cent, slowing from 2.9 per cent in July.

Fuel prices dropped 0.1 per cent in the year to August, easing the squeeze on consumers, while clothes prices dropped one per cent.

But food inflation accelerated to 2.1 per cent, alcohol prices rose 2.5 per cent and tobacco jumped 8.3 per cent.

The Bank of England expects inflation to drop below its two per cent target next year, but analysts are increasingly sceptical that price pressures will continue to ease.

“We expect this downward trend to turn upwards again soon, with sources of upward pressure emerging over the months ahead including from university tuition fees, higher food prices following the recent US droughts and higher pump fuel prices too,” said Investec’s Victoria Clarke.

“We see those pressures, coupled with underlying base effects, as potentially pushing CPI inflation back to the three per cent mark by the middle of next year.”