The worst of the rise in inflation is likely over. But as the economy stutters, and with Brexit chaos looming, wage earners will be waiting a long time for any real reliefby George Magnus / June 20, 2017 / Leave a comment
The recent election, the Grenfell Tower tragedy and Brexit negotiations, which start this week, continue to dominate our news and send shockwaves through the land. The economy continues to rumble on, regardless, but all is not well. Last week, the inflation report for May revealed that the annual rise in consumer prices had risen to 2.7 per cent. Only a short time ago in 2015, the annual change in the index was struggling to remain above zero, and actually failed to do so for a few months. Now it is the highest rate for four years. As if on cue, the Bank of England’s Monetary Policy Committee (MPC) met soon afterwards, and voted 5-3 to keep interest rates unchanged at 0.25 per cent. The MPC hasn’t had this close a call in quite some time. So, is inflation getting to the point, where to cap everything else, higher interest rates are on the way?
The answer to this is almost certainly no—but while inflation won’t bite much harder than it is now, wage earners aren’t out of the woods by a long shot.
The inflation figures were affected in May specifically by air fares going up, a rise in energy costs, and generally by the so-called “pass through” of Sterling’s depreciation in the wake of the referendum result this time last year. In other words, the weaker pound has made everything we import more expensive, and while some companies absorb some of these extra costs in their profit margins, much is passed on to other companies and of course to consumers. We should be over the worst of the acceleration in inflation. Input prices, or the index of prices paid by companies was still 16.6 per cent higher than a year ago, but the rate has fallen from almost 20 per cent in January. Nevertheless, it would be a mistake to assume that the rise in the Consumer Price Index has ended. The Bank certainly expects it to rise to over 3 per cent this autumn, and we should not forget that Sterling has weakened again in the last few weeks.