Bank of England Governor Andrew Bailey: feeling the inflation heat
(Picture: PA Wire)The Bank of England, and indeed the public, are in a bind. Inflation seems to be running away from the central bankers, who some say just didn’t move quickly enough to raise interest rates.
The Bank has seemed to acknowledge that itself, tuning down the previous rhetoric that inflation was a global matter outside of its control. Governor Andrew Bailey was arguing that raising borrowing costs wouldn’t do anything to lower energy prices. Lately the stance has been that the Bank has to do something, and, perhaps, be seen to do something, with interest rates one of the few real levers at its disposal to pull.
What will inflation be tomorrow?
The guess is that January inflation was 5.4%, the same as it was in December. So the price rise surge has at least levelled off.
The problem is that is likely to be a temporary matter. The economy started the year more slowly than previously expected and people reigned in spending. So even if it is steady on Wednesday, that doesn’t mean the surge has stopped.
How high could it go?
Many in the City are now saying, hoping, that it peaks at 7% later this year. And that inflationary pressures then ease. In some ways, that won’t relieve the pressure on hard pressed households since inflation is only counted once. So if petrol prices double one year and then stay there the next, that higher cost stops being measured as inflationary even though workers are finding it just as expensive to fill the car with fuel.
Could we follow the US?
That seems a fair bet. US inflation hit a 40-year high of 7.5% in January, something that rattled markets at least as much as military issues in Ukraine.
Paul Dales at Capital Economics said: “Recent trends suggest that where US inflation goes, UK inflation will soon follow. It’s no surprise that inflation in both economies is moving in the same direction. This usually happens because the economic cycles in the US and the UK tend to be closely aligned and as inflation in both economies is influenced by the same global factors. But it is striking how over the past year inflation in the UK has followed inflation in the US with a lag of about six months.”
Is pay keeping up with inflation?
Until recently it was. Figures on Tuesday were less hopeful. While pay is up 6.3% year on year, real wages fell 1.2% in December. If that trend continues the cost of living crisis to going to hit ever higher numbers of people. Falling wages and rising prices are an awful combination that inevitably leads to lower economic growth. The solution to this is not obvious and it may take some time to turn back around the right way.
Anything else bad happening?
Oh, not much. Oil is at near seven-year highs. Company insolvencies hit 1560 in January, double what they were a year ago. Christina Fitzgerald of insolvency and restructuring trade body R3, says:
“The increase in corporate insolvencies is being driven by a rise in compulsory liquidations, which were 131.4% higher than this time last year. This suggests that creditors are now starting to take action over unpaid debt, having been legally prevented from doing so since the start of the pandemic.”
There seems to be a risk of a third-world war. These are bad for the economy.
Uh huh. Anything more?
The so-called Misery Index – that’s the unemployment rate added to the rate of inflation – was at 9.2% in November. Its highest since late 2013.
