Rising inflation in the UK is worrying, but the Bank of England should not overreact | Inflation

A rise in the inflation rate to 9.4% is a blow to City analysts who had predicted it would only rise to 9.3%. But their bruised egos are irrelevant to the financial shock suffered by households and businesses facing the largest annual increase in the cost of living since 1982.

Over the past nine months, food, fuel and energy prices have pushed up inflation. In June, petrol was again the main culprit, rising by more than 20 pence a liter and making transport costs extremely high for car, truck and train owners.

A year earlier, inflation stood at 2.5% and appeared stable as the world emerged from the worst of the coronavirus pandemic. That was before we realized China was planning to keep lockdowns in place everywhere and whenever Covid reared its head, hitting the country’s ports and manufacturing base. Since then, supply chain lockdowns have restricted trade and driven up prices.

Brexit also played a role. The prospect of visa restrictions for workers coming from the EU was clear from the moment Boris Johnson declared the hardest Brexit. There has been a labor shortage since, driving up costs for employers.

In the summer of 2021, with the International Monetary Fund predicting a return to global growth and lower inflation rates, a Russian invasion of Ukraine was a low-probability risk. Today, food prices are more than 10% higher and much of the responsibility for this rise can be attributed to Moscow.

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The cost of living crisis has risen to the top of the agenda and, in particular, the squeeze on disposable incomes of those who have been unable to save during the pandemic and who are in the lower half of the economy. income scale.

There was a bit of good news in the latest numbers. The Office for National Statistics’ measure of core inflation, which excludes the more volatile components of energy, food, alcoholic beverages and tobacco from the headline consumer price figure, was 5.8% in June and 6.5% for “basic” goods – the lowest since January.

The core inflation figure for goods is also lower than the Bank of England had forecast in its last forecast in May, when it predicted it would rise just over the 7 rate. .9% of March.

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Samuel Tombs, the UK’s chief economist at consultancy Pantheon Macroeconomics, said he went further and removed one-off costs facing the services sector to give an “underlying” implicit services inflation rate of 2. .9%, shows that it “is in line with its average rate of the 2010s, suggesting that Britain does not have a problem with locally generated inflation”.

His argument is that, apart from the Brexit fiasco, inflation is entirely driven by factors outside the UK, and there is little the Bank of England can do to quell these causes of inflation when it threatens to raise interest rates further.

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That reasoning didn’t stop Bank Governor Andrew Bailey from hinting Tuesday night that a half-point hike was “on the table” at next month’s monetary policy committee meeting. Bailey said the central bank was aware of the risks that inflation could trigger price and wage increases, and if those pressures persisted, more forceful action would be needed.

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The latest labor market survey shows wage increases are stuck at half the level of inflation. Meanwhile, the main components of inflation are, like the weather, cooling.

Business leaders are preparing for a recession in the coming months. Higher interest rates represent another financial burden on households and businesses that they could and should do without.

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