Inflation is falling, but not as fast as everyone hoped. The Bank of England expected a bigger drop and so did the majority of City analysts.
A fall in the consumer prices index (CPI) to 8.7% in April from 10.1% in March put an end to the UK’s long period of double-digit price rises but was not the 8.2% analysts forecast.
When the global price of gas began to plummet in the first months of the year, there were forecasts from some of the City’s big hitters that inflation would drop to below 3% by the end of 2023.
Those predictions are now in the bin. Inflation is more likely to end the year above 5%, prompting the central bank to push interest rates up from 4.5% towards 5.5% if the latest betting on financial markets is a guide.
And there are political implications. Rishi Sunak may miss his target of halving inflation by the end of 2023. Jeremy Hunt will need to explain to the nation why the government’s borrowing costs, which are tied to some extent to inflation and the interest rate charged by the Bank of England, could escalate sharply.
In the search for who or what to blame, the first culprit is food, which hit an inflation rate of almost 20% earlier this year and has remained at that level ever since.
It was only on Tuesday that Hunt met food producers to ask them why prices continued to accelerate when all their major costs were falling. From his public statements, he was none the wiser, saying only that he reserved the right to impose price controls.
Hunt’s Treasury staff have failed to produce any studies examining why food inflation remains a significant factor, preferring to rely on surveys.
Analysis by the Office for National Statistics in January examined the extra costs faced by the corporate sector but the information in the study is now six months out of date.
What we know from more recent data is that for the last two months at least, businesses have put up prices by more than their costs have risen. The latest data for April shows input prices were up by 3.9%, while output prices increased by 5.4%.
The cost increases faced by farmers and food manufacturers are likely to be falling at a faster rate. Fertiliser prices have dived, energy prices have eased and agricultural and manufacturing wage rises are modest, which begs the question why food prices are still accelerating.
Paul Donovan, the chief economist at UBS wealth management, is clear that thousands of companies, those with the pricing power in their sectors, have jacked up bills for many months, improving profit margins at their customers’ expense.
Corporate-driven greedflation is considered a problem in the eurozone and is much discussed in the US, where Isabella Weber, an economics professor at the University of Massachusetts, has more than 1m hits for her study linking inflation to a corporate raid on customer wallets.
The Bank of England governor, Andrew Bailey, worries about food inflation but, like Hunt, he has failed to commission any in-depth research from his 4,500 staff.
The governor has focused more on the second culprit, core inflation, which leapt in April to 6.8% from 6.2% in March. Core inflation strips out volatile items such as food and energy. The increase here is being driven by business services – which includes workers in finance, accounting, legal, marketing and advertising. This category experienced wage inflation of 8.8% in the three months to the end of March, according to the latest ONS figures.
Again there is an absence of research on the drivers behind core inflation. The problem for Bailey is that without a grip on the sources of inflation, the public’s already waning trust in the central bank may sink further.
