Belfast Telegraph

Families to suffer as prices rise over wages

By Clare Weir

The first half of this year will see very challenging economic conditions in Northern Ireland as prices race ahead of wages, it has been warned.

UK inflation in December remained at 2.7% for the third consecutive month, according the Office of National Statistics (ONS) - and is currently at its highest level since May 2012 and has remained above the Bank of England's 2% target since November 2009.

Increasing food prices, domestic gas and electricity costs were only partially offset by a fall in the price of motor fuel and air transport, according to the ONS.

Dr Esmond Birnie, chief economist with PriceWaterhouseCooper in Northern Ireland, said that high inflation is steadily eroding consumers' spending power.

"Back in November, the Bank of England said they expected inflation to peak in the third quarter of 2013 and only hit its 2% target in 2014," he said.

"But in the meantime, export markets remain volatile, competitive and constrained, and subdued household spending is unlikely to drive growth and recovery.

"That means the first half of 2013 will see very challenging conditions, particularly in regions like Northern Ireland where falling public spending and sluggish private sector activity are combining to constrain growth," he added.

The figures also show the rate of the Retail Prices Index (RPI), which includes housing costs, rose to 3.1%, up from 3% last month.

It was also pushed up by rising fuel bills.

Experts do not believe inflation will stay at 2.7% for long, with food inflation set to increase over the coming months after poor UK harvests due to last year's severe wet weather.

A Treasury spokeswoman pointed out that inflation was nearly half of its 5.2% peak and that the Government had taken more action to help households with the cost of living, including a further increase in the tax-free personal allowance and cancelling the fuel duty increase that was planned for this month.

Above-target inflation is proving a headache for policymakers at the Bank of England as they weigh up mounting signs of economic gloom against faster increases in the cost of living.

The economy is looking likely to have suffered a fresh contraction in the fourth quarter, according to some estimates, and could be heading towards an unprecedented triple-dip recession.

But the Bank may be reluctant to push the button for more quantitative easing - printing money - given the outlook for inflation.