Budget tax hikes will increase inflation

Figures from the Office for National Statistics show that chancellor George Osborne's Budget will add 0.26 percentage points to the CPI measure of inflation in 2012/13 (release). Tobacco and alcohol duty increases alone will see inflation rise by 0.2 percentage points, with vehicle excise duty, air passenger duty and VAT making up the remainder.

Data this month showed that CPI currently stands at 2.8 per cent, well in excess of the Bank of England's target of two per cent and inflation is not expected to return back to target for at least three years.

Former Monetary Policy Committee member Andrew Sentance believes that high inflation is denting the UK's recovery:

That was exactly the right policy in the depths of the financial crisis in 2009, but I don’t think it is the right approach now. Tolerating inflation is contributing to the squeeze on consumers, which is one of the main negative factors behind weak growth. Savers have suffered from low interest rates for a prolonged period of time and are also cutting back on their consumption.

Another concern is the impact of a very low interest rate policy, accompanied by high inflation, on the value of the pound. The official Bank of England view is that a weak pound helps the rebalancing of the UK economy towards exports. But we have seen little evidence of that because UK exports are not price sensitive and the UK doesn’t have lots of spare capacity in exporting industries. Instead, a weak currency squeezes consumers and probably does more harm than good.

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