Inflation in the UK is high, rising, and starting to feed itself
The Bank of England argues inflation is rocketing due to a series of economic shocks, as Economics Editor Joel Hills reports
No more softly, softly. In a speech last night, the Governor of the Bank of England, Andrew Bailey, hardened the language he used to describe the Bank’s commitment to taming inflation. And little wonder. Inflation is burning red-hot and spreading in a way that is causing hardship and alarm. The headline annual rate of inflation rose to a fresh 40-year high of 9.4% in June, driven higher by petrol prices which rose by 18 pence a litre in June alone - the largest increase since the ONS began recording in 1990. “Countries around the world are battling higher prices,” points out the chancellor, Nadhim Zahawi.
He’s right, of course. But the UK not only shares continental Europe’s problems of runaway energy and commodity prices, it also has the added headache of a very tight labour market - something which is generating painful inflation in the United States. The result is that the rise in prices here looks broad-based. It’s striking that, with the exception of audio-visual equipment and spirits, every category item that the Office for National Statistics (ONS) measures has got dearer in the last year. The rise in food and energy prices are causing terrible distress but the UK has much more than a food and energy problem.
What’s known as “core” inflation - which strips out the price movements of traditionally volatile items like food and energy - is running at 5.8%. That’s down very slightly on May but still well above the Bank of England’s 2% target. More unsettling perhaps, sevices inflation reached 5.2% in June. This is an unmistakable sign that wages are picking up domestically (we don’t tend to import many services) and compelling evidence that inflation is starting to feed itself.
Business and Economics Editor Joel Hills provides analysis on how long the inflation crisis could last
Of course, higher wages may seem like the perfect tonic for a bout of rampant inflation but the lessons of the past are there is a point beyond which they become self-defeating. When the Bank of England urges wage restraint it isn’t trying to make everyone poorer - 9% inflation is doing that already - it is trying to ensure that the pain is short-lived and that higher pay doesn’t unleash yet another round of price rises. The sad truth is that inflation is high, forecast to rise further as we head into winter and there are clear signs that it is starting to become what an economist would call “embedded”. The Bank can do very little about the economic shocks caused by the pandemic and the war in Europe but it can influence the demand for labour domestically by slowing economic activity. In the current climate, the Bank has little choice but to raise interest rates even as the economy sits on the edge of recession. The question now is how high interest rates will need to rise to get inflation back on the leash. The trade-off looks like one between inflation and economic growth, in fact the real choice is tackle inflation quickly and effectively or delay and risk allowing it to seriously undermine employment and growth in future. There is no easy way out.
The Bank of England must take "tough action now, even though it will bring some pain," Sir John Gieve told ITV News.
“We’re in a bad position and it could get worse,” says Sir John Gieve, who was a member of the Bank of England’s Monetary Policy Committee from 2006 and 2009. “At this point government and Bank of England need to err on the side of caution in getting inflation down. They have to take tough action now even though it will bring some pain,” he told ITV News.
There will be "serious consequences" if inflation becomes embedded.
“In the 1970s we ended up with inflation at 20% and it took us ten years of hard labour and two recessions to get it down again. If you do let inflation get embedded then you’re looking at really serious consequences.” Bank rate is currently 1.25%, the markets expect it to reach 3% by the end of the year. The Bank of England used to talk about high inflation being “temporary” and interest rate rises, when they came, being “gradual” and “limited”. The message has changed. In his speech last night, Bailey pledged to tame inflation “no ifs, no buts” and to “act forcefully” if necessary.
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