This feature is part of our FREE daily Money Morning email. If you’d like to sign up, please click here: Money Morning
If there was still any uncertainty about whether the Bank of England will hike rates at its November meeting, the latest inflation data must have disposed of it.
Headline consumer price inflation (CPI) for September remained well above the 2% target, but more worryingly there were signs of a pick-up in other inflation measures as well. For example, core CPI inflation (which excludes energy, food, alcohol and tobacco) rose from 1.1% to 1.4%, its highest level since February.
Of course, energy prices are the first thing to check in inflation statistics these days. Dovish commentators have long been claiming that once oil prices stop rising, inflation will fall back. But will it really?
So far the evidence isn’t supporting their case. The recent slump in crude has seen petrol price inflation tumble from 7.5% to -3.8%. Yet headline inflation barely budged, easing from 2.5% to 2.4%.
The problem is that even when oil isn’t going up there are plenty of other props to hold up inflation. And it doesn’t look like they’re going away any time soon…
Firstly, there are the price pressures that we already knew were coming. Headline inflation last month was buoyed by already-announced hikes in gas and electricity costs. These alone make something of a mockery of the whole ‘cheaper energy prices’ argument. Yes, petrol prices at the pump will fall back on cheaper crude. But ask yourself: how soon will utility companies hand back any increases they push through? ‘Never’ is the first answer that springs to mind.
Still, central bankers often say that they can live with higher energy inflation. (Realistically they don’t have any choice, since they have no control over oil prices.) Their main headache is stronger prices elsewhere in the economy. And the signs are not good here either.
Once again, we see evidence that retailers are managing to make their price rises stick. Clothing & footwear and household goods & furniture were both stronger in September, making a major contribution to the rise in core inflation.
And looking ahead, there are plenty of other pressures building up in the pipeline. The October figures will include a hit from higher university tuition fees. But more importantly, surging agricultural commodities markets mean that there’s a real risk of food price inflation.
Food may be a ‘non-core’ good for inflation purposes, but try convincing consumers of that. Nothing is more guaranteed to have workers asking for a pay hike than inflation in something they can’t do without. And higher wage demands are just what the Bank needs to avoid. Otherwise, companies forced to pay higher wages may try to claw back profits through higher prices, which boosts inflation, leading to more wage demands, and so on in a vicious circle.
With this in mind, it’s worth looking at the Bank’s previous inflation measure, the old retail price index (RPI), which has hit an eight-year high of 3.6%. That’s just above the level at which the Bank’s Governor would have had to write an open letter to the Treasury explaining why the inflation was higher than it should be. What a fortunate thing that Gordon Brown switched to using the CPI measure when he did.
But RPI still matters, and not just because it’s a marginally more realistic measure of the cost of living than CPI. Many pay deals are still linked to RPI, so realistically the Bank must keep this index under control as well to avoid those dreaded wage pressures.
The latest data means that the Bank will have to raise rates in November, but after that the path is less clear. Today, analysts will be scrutinising the latest Monetary Policy Committee minutes for clues. At present, the majority believe that this is the peak of the cycle. But with real-world inflation still evident on the high street, in people’s utility bills and perhaps soon on the supermarket shelf, more hikes will probably be needed to keep expectations under control.