Consumer prices jumped unexpectedly last month due to the higher cost of air fares, petrol and utilities,” announced a headline in the FT this week. The headlines in the other newspapers were much the same.
There are two points to make about this. The first concerns the ‘unexpected’. The rise was largely down to rising air fares and petrol prices. But both of these are dependent on the oil price and it is hardly a secret that the oil price has been high for some time now.
The only surprise is that anyone is remotely surprised. I can’t imagine that the full effect of the rising oil price has fed through into the numbers yet, so the odds are that inflation will pick up in December as well. Will that be considered completely unexpected too?
The other point to make is that the next round of wage negotiations will kick off in January. Analysts may claim that inflation isn’t yet a problem. Strip out oil and rising utility bills, they say, and inflation is running at a mere 0.9%. And anyway, on the Government’s preferred measure – the consumer price index – prices are only rising at an annual rate of 1.5%.
That’s well below Gordon Brown’s target of 2%. But while this may sound reassuring, it is to entirely miss the point. Economists may be able to strip out everything that is rising in price from the numbers they use, but the rest of us can’t (we still have to pay those higher utility bills, housing costs and insurance bills) and that’s why, when it comes to wage negotiations and the like, no one looks at Gordon Brown’s favourite numbers. They look at the numbers that reflect reality instead, such as headline inflation (as measured by the all-items retail price index) – which hit a four-year high of 3.4% in November.
This is bad news. Last January, when the last round of pay negotiations happened, headline inflation was running at about 2.5%, so most deals were struck at around 3%. But this January, 3% is going to be a distant dream to most employers. With inflation well over 3%, their workers will insist on 3.5%-4%. Calculate that into forecasts for the consumer price index and that critical 2% level looks a little closer.
Inflation, it seems, is back, something that might mean that MoneyWeek’s James Ferguson is going to turn out to be right on interest rates. He’s taken a fair amount of flack over the last few months (from other members of our Roundtable and from readers) for sticking firmly to his forecast that the next rise in interest rates in the UK is more likely to be up than down. Personally I hope he’s wrong (I’ve still got a house to sell), but I’m pretty sure he’s right.