Today’s jump in inflation is more to do with low prices last year than it is to do with the collapse in the value of the pound. That is still to come.
An increase in the rate of inflation hurts borrowers and those on fixed incomes as inflation erodes the value and purchasing power of money. On a personal note, my drive to school is becoming increasingly expensive as the price of oil recovers from the lows of 2015. The fall in Sterling will see prices at the pump rise further. However, there are winners. Borrowers will see the real value of their debts fall. The Government, as the UK’s largest borrower, will be one of the beneficiaries.
Still, the higher price of imported goods may end up hurting exporters, the direct beneficiaries of the fall in the value of the Pound. Although the price of British goods in foreign currency terms is falling, the costs of imports are rising, so British exporters may see their costs of production rise offsetting, to some extent, increasing profits thanks to higher foreign demand.
At present, the inflation rate remains below target, so, perhaps, a little more inflation is good thing. However, when the rate rises above target the MPC will be under pressure to hike the bank rate. The UK debt mountain has grown rapidly thanks to access to very cheap credit, higher rates will hurt those with large mortgages, car loans, credit cards, etc, and we could see the UK slip back into recession as result of a collapse in consumer spending.