This is a grim number. Inflation isn’t just stubborn, or sticky. It is, on the latest numbers, stuck. These figures should be falling by now, and they are in other countries such as the US and Germany.
My inbox was deluged with instant takes at 7am ranging from “unfortunate” to “challenging” to “disaster”.
Over the past 18 months the Governor of the Bank of England has told the BBC workers should not ask for excessive pay rises and companies should not hike prices too much either.
Core inflation, a measure of underlying and ongoing inflationary pressure that strips out month to month volatility, is, however, going up, even as it is in decline elsewhere in other major economies. The polite requests have not worked.
The response of Karen Ward, a respected City economist who serves on the chancellor’s council of advisers that the Bank of England “has to create a recession” partly to “nip in the bud” a spiral of wages going up and in turn pushing up prices, and then pushing up wages again.
“It’s only when companies feel nervous about the future that they will think ‘Well, maybe I won’t put through that price rise’, or workers, when they’re a little bit less confident about their job, think ‘Oh, I won’t push my boss for that higher pay,'” she told the BBC’s Today programme.
She said out loud what the Treasury cannot say out loud but has implied in repeated interviews – people have to feel the pain for interest rate rises to work. The Chancellor again said he would support the Bank of England in its decisions – making clear his support for further rate rises. But any hope of a controlled economic descent with plenty of distance ahead of an election late next year, now looks fraught.
But it is not just about the specific decision on Thursday, but about the path of interest rates for the next two years. The markets are pretty openly questioning whether the Bank is in full command over where inflation is going. Financial markets and banks are effectively pushing up fixed term mortgage rates, without waiting for actual Bank of England decisions.
But the unflattering international comparison also shows a limit to how much the government can blame everything on “global factors”. Continental Europe was particularly hit by surging energy prices in the aftermath of the Ukraine war, the rest of the world by food prices, and the US by a worker shortages. The UK still suffers from a cocktail of all three.
And the government’s own post Brexit policies on trade and workers may have lessened competitive pressures that would in the past have brought inflation down more rapidly.
Wednesday’s number shows that the already tricky balancing act between inflation and recession is getting worse. It may require more than just the Bank of England to do the heavy lifting.
Source : BBC