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Cost of living going up

Inflation rise should prompt VAT cut says Cameron

Money - own picInflation’s rise to 2.9% has reinforced the case for a temporary reduction in VAT, says a Scottish business leader.

New figures show that the cost of living as measured by the consumer prices index has risen to its highest rate for more than four years from 2.7% in April. It is expected to hit 3% next month.

Inflation was pushed up in May by higher prices for holidays abroad as a result of sterling’s earlier sharp drop. There was also upward pressure from recreational and cultural goods, mainly computer games, food prices and higher utility bills as more of the “big six” energy suppliers lifted their tariffs.

Prices for clothing and furniture & household goods also rose. Inflation was prevented from rising further in May by lower motor fuel prices and by an unwinding of Easter-related price hikes in April, notably for air and sea fares.

Liz Cameron, chief executive of Scottish Chambers of Commerce, said: “This week we have learned that household spending has fallen for the first time in four years, which comes as no surprise given continued high inflation, which has been outpacing increases in earnings. 

“This is an early warning sign that there is a real threat to our economy from a decline in consumer spending power.

Liz Cameron
Liz Cameron: VAT call (photo by Terry Murden)

“Although the political situation at Westminster has not yet fully settled down following last week’s General Election, the continued elevated rate of inflation above the Government target of 2% calls for urgent action to address the impact this is having on businesses and consumers.

“At the time of the financial crisis and recession in 2008-09, the UK Government reduced VAT on a temporary basis in order to bolster consumer demand and it is time that such a move was considered again to give people the confidence to spend and to reduce the pressures on business margins. 

“Everything possible must be done to maintain consumer confidence in these uncertain times to provide a route to business growth and economic prosperity.”

Howard Archer, chief economic adviser to the EY ITEM Club, said inflation now looks likely to push through 3% next month.

“Inflation looks set to breach 3% in June and it is likely to peak at around 3.2-3.3% in the second half of the year as sterling’s past slump is unlikely to have fully fed through yet,” he said.

“However the risk of inflation going markedly above 3% looks to have been diluted for now at least by sterling firming from its early-2017 lows and oil prices softening.

“The Bank of England will be far from happy with inflation rising to 2.9% in May but it remains odds-on that the MPC will continue to look through the inflation overshoot and leave interest rates unchanged on Thursday following their June meeting.

“Indeed, the case for caution has been magnified by the economic risks of increased political uncertainty. It looks ever more likely that the Bank of England will hold off from raising interest rates until 2019.”

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