At last, some good news on inflation. Even the inevitable “but” that follows the good news is not that much of a but. More of a ‘bu,’ in fact.
At first glance it may not seem like good news. The CPI rate of inflation stayed on hold in November: at 2.1 percent it is 0.1 percentage points above target. The retail price index went up, hitting 4.3 percent.
Why is that good news? Well, with the price of oil up there in the stratosphere, with food prices rising faster than an Auntie Bessie’s Yorkshire pudding, we were all expecting so much worse.
The core rate, that’s with food, energy and tobacco taken out, was down in the month to just 1.4 per cent.
Now it is true that by focusing on the core rate, it does feel as if economists are in effect saying, “Ignore all the bad news, and the rest of it is good!” Nonetheless, there are reasons to focus on core inflation. Many believe that the recent rises in energy and food prices are one-offs and in which case they will fall back soon. Even if they don’t fall back, but merely stay where they are, then the impact on inflation will not be significant; remember that inflation is defined in terms of a sustained rise in prices.
There are some reasons to fear rising prices over the next few months. For one thing, according to a recent survey from the Bank of England, inflation expectations are on the rise. For another thing, manufacturers are upping the prices they charge; the high price of oil is likely to show up in utility bills next spring.
On the other hand, to see other forces at work that could counteract this effect, just wander down to the High Street. There seem to be more sale signs than there are Christmas decorations. Or have sale signs become the new Christmas decoration?
And before the latest inflation report had time to gather dust, out came the Bank of England with the minutes of its last meeting. It would seem that the hawks have given up, and the dovecote is now brimming over. White feathers were everywhere to be seen. The committee now reckons the risk to growth is outweighing the risk to inflation, and “a substantial loosening in policy might be needed.” As for the voting, well they all voted for the rate cut. The rate cut vote went 9–nil.
And with that, the pundits are clambering over each other to predict rate falls next year. Some are even predicting rates of 4 per cent next year.
If interest rates do indeed fall next year, don’t be surprised to see sterling fall in their wake.
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