We wrote last week of our concerns regarding inflation. So we weren’t particularly surprised to see Tuesday’s numbers. They showed the Consumer Price Index rising at 3.3% (1.3% above the official target of 2%) and the Retail Price Index (excluding mortgage interest bills) at 4.4% (not far off 2% above its old 2.5% target).
But that doesn’t mean we aren’t worried about them. Today’s inflation is very visible. It isn’t the prices of things we rarely buy – DVD players and new cars – that are rising at speed, but of the things we regularly buy and that we have to buy – energy, food and the like. Everyday brings a new nastiness of some kind. On Tuesday alone we read that Majestic is warning wine prices might have to rise by 10% to cover the costs of transport and the rising euro, and that even the price of bananas is set to jump by 8%.
When price rises are this obvious and this immediately painful, they can shift inflationary expectations fast. This is exactly what’s happening right now. Last week the Bank of England/GfK NOP inflation expectations survey showed that, even before the most recent numbers were released, the UK consumer was expecting prices to rise by 4.3% over the next 12 months. So far wage demands have remained reasonably muted in the face of the fast-rising cost of living, but these days there seem to be strikes, or threatened strikes, all over the place. Last week brought the Shell tanker drivers strike, for example, which went ahead despite Shell pointing out that they have no trouble at all recruiting staff. It also meant I had to drive miles across London and then queue to get petrol last Friday. The worry here is that the longer this goes on, the more likely it is the Shell drivers will be joined by the many other disgruntled workers in the UK economy and that this will translate into higher wage settlements all round.
And it is going to go on for a long time. There is some hope that Britain’s miserable economic situation will soon bring inflation down all by itself. But the problem is that our inflation rate is no longer really something we can completely control. There isn’t much we can do about rising fuel and food prices, and we also can’t do much about the fact that most other countries have significantly looser monetary policy than we do. Martin Hutchinson, writing on Breakingviews this week, points out that of the 55 countries whose data is regularly surveyed by The Economist, 12 have double-digit inflation rates, and of those, nine have negative real interest rates. As does America, where inflation is running at 4.2%, yet interest rates are a mere 2%. That’s cheap money – and not exactly a text-book environment for controlling inflation.
Still, not everything is going up in price. Houses in Britain are going down. Fast. Our experts give their views this week on just where and when they might bottom out. The news – as you might have guessed – is all bad.