A load of fevered comment today about inflation rising to 3.7 per cent, approaching twice the level of the Bank of England’s target.Does this mean interest rates are about to shoot up as the Bank tries to keep a lid on rising prices? Surely the Monetary Policy Committee will be under pressure to do just that at their February meeting?
Calm down, calm down. Graham Leach, chief economist at the Institute of Directors, was among the first to point out that underneath this headline rate of inflation, some of the underlying numbers – the kind of stuff which excludes the temporary effects of tax rises like VAT – are still where they need to be.
We shouldn't forget, either, that inflation hit five per cent towards the end of 2008, before crashing down to one per cent a year later. So 3.7 per cent ain’t quite the hit-the-panic-button level some people are suggesting.
While a lot of businesses would love to shove their prices up there are all sorts of reasons why inflation may well settle down as the year progresses. In normal circumstances, it starts rising because high demand stretches factory capacity, but at the moment a still-weak economy means most businesses are not working flat-out. Another crude measure of the conditions for rising prices is peoples’ ability to pay. Again, we’re not exactly flush with cash at the moment. Finally, a weak economy also means businesses are having to compete hard against each other for scarce business – which tends to drive prices down.
Put all those factors together and you have reasons why it’s less likely inflation will spiral out of control and less likely the Bank of England will ratchet up interest rates immediately.
We’ve all noticed prices rising most at places like the petrol pumps, so here’s another piece of news today which might turn out to be a bit more significant: some of the member states in OPEC (the Organisation of Petroleum Exporting Countries) are, according to the FT, quietly increasing production.
That may take the heat out of at least one of the key influences on the prices we’re all paying.
OPEC's increase in production will probably take a few pennies off the price at the pumps for a few weeks but then it's sure to shoot up again.
ReplyDeleteWhatever happened to the £1 a litre protests?
Meanwhile HMRC's rate over 4,000 miles remains at 25p/mile, where it's been for at least 8 years...
I don't think anyone is suggesting that the long-term outlook for oil-based fuel is anything other than up, and mitigating its impact on business has to be a key part of the strategy for anyone who relies on it - all the way from how you use it to whether there's a realistic alternative. It's for business pressure groups to make a noise about short-term measures which might help soften the impact of a major cost when times are tough. One for George Osborne to dwell on in March (if not before).
ReplyDelete