credit forcing up the cost of UK goods and services. This can be
seen in the increase in Retail Price Index between July and Au-
gust, from 3.2% to 3.5%, with increases seen in particular in
the cost of transport due to rises in sea and rail fares. Further-
more, an appreciation in the interest rate will add more to the
economy due to interest on the government debt.
It is believed this shock rise in inflation occurred due to a fall in
the exchange rate. As a result of this, imports for those in the
UK has been seen to rise in price, while competitiveness of
goods abroad has risen. Due to this, we have seen both an in-
crease in aggregate demand over the period of August than that
in July, however, cost-push inflation due to UK goods costing
more to produce may also have contributed to the unexpected
rise in inflation for the period in question.
Despite this, with employment at a record high, real wages ris-
ing at a rate of 2.9%, higher than that of the current CPI (2.7%)
and little spare capacity in the UK economy, it appears that the
rise in inflation seen over August is not all bad news. The Bank
of England have forecast that future disinflation, where price
levels continue to rise but at a slower rate, is likely and that our
target 2% rate is still probable by 2020, suggesting that, despite
the initial rise seen following the higher Bank Rate, it should
achieve the purpose it was set out for in the near future.
Ultimately, all eyes now lie on Theresa May to see what deal, if
any, will be agreed with EU officials regarding the UK’s exit
from the EU. With the risk of leaving the EU with ‘no deal’ cur-
rently sitting at 50:50, it may remain uncertain as to how effec-
tive a higher Bank Rate will be until March of next year.
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