What a dilemma. Yesterday, we told how some workers are accepting cuts in wages – in the longer-term this could lead to a period of deflation, especially when oil and food prices peak, and then in due course work their way out of the annual inflation data. But that is a problem for next year, maybe the year after. Right now, it is the opposite, and more evidence emerged yesterday to suggest inflation is back.
In fact, the latest data from the Office for National Statistics was so bad that economists were being forced to give their Thesaurus a battering, as they reached for the right words. “Absolutely horrendous,” said Jonathan Loynes at Capital Economics; “Absolutely appalling,” said “Howard Archer at Global Insight; and “Absolute Beginners,” said David Bowie.
It’s producer prices that are bringing such woe. Non-seasonally adjusted year-on-year input prices rose by a stunning 27.9 per cent in the year to May. It’s a record. Even more alarming, if you strip out food and oil, prices were still rising by 14 per cent.
Then there’s manufacturers’ output prices, that is to say, what they charge their customers. Ouput price inflation hit 8.9 per cent, and even underlying inflation, that’s with food and energy taken out, was 5.9 per cent.
Okay, food and oil will stop rising, eventually, and as we have argued here several times recently, beyond that may well fall. But news of rising underlying prices is ringing some seriously loud alarm bells.
Capital Economics said: “Admittedly, some of the rise in ‘core’ PPI inflation reflects sharp increases in those elements which are heavily influenced by oil prices, such as chemicals. But other components such as machinery and equipment have also seen prices rising more quickly over recent months.”
It does of course leave the Bank of England with a terrible dilemma. With bad news seemingly the UK’s biggest import at the moment, British industry needs a rise in the rate of interest like it needs a hole in the head.
And yet, a rise in interest rates is precisely what money markets are factoring in. In fact, yesterday, the SWAP market for two-year mortgage deals saw its biggest one-day increase since 1992.
Capital Economics says: “The chances of a recession are growing by the day.”
Yet, with credit so tight, with no evidence wages are seeing inflation-busting rises, the prognosis for inflation in the longer-term still sits in the balance. The Bank of England runs the risk that by fighting the inflationary pressures that are currently exerting so much pressure, it could be stoking up deflation further down the line.
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