Had the prime minister not spent Wednesday preparing to roll back Britain’s climate policies, the big story of the day would have been a good news one for the government: inflation continues to fall.
The Consumer Prices Index (CPI) dropped to 6.7 per cent last month, down from 6.8 per cent in July. Not a gigantic change, and still well above the 2 per cent target, but far better than City predictions of a rise to 7.1 per cent. Meanwhile, core inflation fell from 6.8 per cent to 6.2 per cent.
And it was this set of data that may well have been the difference between another interest rate rise and what actually took place today – holding steady at 5.25 per cent. This represents the first time the Bank of England has declined to raise rates since late 2021. Happy days are here again.
Not so fast. In a short video with the sort of stiff delivery that harks back to one of those party political broadcasts from the 1950s, Governor Andrew Bailey reiterated that the battle against inflation was not over, and the Bank “will do what is needed” to bring things “back to normal.”
The question everyone wants to know is: have we reached peaked interest rates? The usual rules apply: if I knew the answer, I wouldn’t be giving it away in a free daily newsletter. But what the Bank will know is that it takes a year, perhaps longer, for rate rises to make their way through the economy.
And we are starting to see the impact of these hikes play out, as the labour market begins to soften. The trick is, of course, to bring inflation down with as few job losses and as little economic contraction as possible. No easy task. And if push comes to shove, the Bank will err on the side of a recession.
There’s also a new motto to be aware of. If 2021-22 was all about ‘team transitory’, the idea that the rise in inflation would be temporary, now it’s all about ‘higher for longer’ or the – and I’m not kidding – ‘Table Mountain’ strategy. That is central bankers, most notably Jerome Powell, chair the US Federal Reserve, indicating that interest rates will remain elevated for a prolonged period of time.
The thing to note about such an approach, as the economist Simon French points out, is that “the effectiveness of this message hinges on the credibility of the messenger.” Something he suggests is a barrier to the Bank of England successfully using it.
The slightly less esoteric point is that, even with interest rates unchanged, there is plenty more pain to come for those borrowers yet to fall off their fixed-rate mortgages. Given the proximity of the next general election, and the vast polling lead enjoyed by the Labour Party, we have more than reached the point that good economic news is probably good for Keir Starmer. Perhaps that’s why Sunak tried so desperately hard yesterday to bury it.
In the comment pages, Robert Fox says the generals like Grant Shapps because he wasn’t a soldier. Rachel Johnson accuses dull corporate bores of trying to outlaw the office romance. While Simon English hails the return of the City suit.
And finally, the hardest job on Channel 4’s Sex Education must be the intimacy coordinator. Vicky Jessop speaks with the man himself.
