“The UK’s high inflation rate is like a cat that follows you home and refuses to go away,” said Neil Shah in The Wall Street Journal. Once again inflation came in higher than expected – the annual rate of consumer price inflation (CPI) stuck at 3.1% in August. Higher food and clothing prices, along with a jump in airfares, were the main culprits. Since the start of 2008, the rate has been higher than consensus forecasts in 25 out of 32 months. And it has been more than 1% above the 2% target all year. In May 2009, the Bank of England forecast a rate of 0.75% for the first half of this year. Core inflation, which strips out volatile food and energy prices, rose too, from 2.6% to 2.8%.
What the commentators said
Inflation is “worryingly high”, said Andrew Goodwin of the Ernst & Young Item Club. In the short term, there will be little respite. While cotton prices are now falling, the recent jump in prices to a 14-year high has yet to feed through fully. The same goes for wheat’s 60% increase since late June. Henderson’s Simon Ward recently estimated that the soft-commodity spike could propel food inflation to 7% by the end of the year from under 2% in June. The VAT increase in January will give CPI another fillip.
As far as the Bank of England is concerned, CPI has been skewed upwards by the sharp slide in sterling, changes in VAT and high energy and food prices. But it should abate, given a weak economy soon to face harsh austerity measures. The ample spare capacity in the economy should also bear down on inflation.
The trouble is it’s becoming increasingly difficult to explain inflation using one-off factors, such as weak sterling or food prices. As Neville Hill of Credit Suisse noted, “what should worry [the Bank] is that all the strength in core inflation is domestic”. Inflation in the services sector is 4%, the highest since February 2009. If there’s so much spare capacity, “why is domestic inflation high and rising”? It looks as though the bank may have misjudged the so-called output gap.
The Bank’s monthly meetings are set to become ever more tense. Sticky inflation means it’s becoming “increasingly difficult” to continue with the “wait-and-see approach” without losing credibility, said IG Group. Yet the economy hardly looks ready for higher rates. The Bank must “hope that something turns up, or rather down”, said Neil Collins on Breakingviews. For now, said Shah, we look in danger of ending up with high inflation and a weak economy – “the worst of both worlds”.