Britain is ill-prepared to deal with rising inflation

15 July 2021

8:03 AM

15 July 2021

8:03 AM

Inflation is on the rise again. For the third consecutive month, the Consumer Prices index outpaced the forecasters’ consensus, landing at 2.5 per cent in June, up from 2.1 per cent in May.

It’s not just that inflation is overshooting expectations that should trouble us, but that its pace of growth is so fast: at the start of the year, the headline rate was still close to the ground, coming in at 0.7 per cent in January and March, and 0.4 per cent February.

Now, it’s ahead of the Bank of England’s target – and there are no signs of retreat.

Today’s update from the Office for National Statistics further challenges the Bank’s argument that the rise is simply transitory, especially as it becomes clear that core inflation is up: food prices are increasing, but so, too, are clothes and second-hand cars. Capital Economics – a forecaster which has been relatively calm about upticks in inflation so far – notes that today’s report came as ‘a surprise’, though it still expects any surge to be temporary. Is that right?

It is certainly becoming harder for the Bank to stick to its prediction that inflation will peak around three per cent (we’re already at 2.5 per cent, with lots more reopening to come). It also puts further pressure on the Monetary Policy Committee to U-turn on its repeated votes in favour of seeing out its full money-printing strategy that was designed to fund Covid-19 emergency measures.

Only outgoing chief economist Andy Haldane has been voting to roll £50 billion back, fearing that the Bank is simply ‘pouring the punch’ for an already messy party. The rise also fits an international trend: with inflation now over five per cent in the United States, it would seem the act of funnelling money into re-emerging economies is resulting in similar consequences.

At 2.5 per cent, CPI inflation is relatively low by historical standards. Indeed, an inflation spike of a few percentage points is probably overdue, and could help tackle the country’s mounting debt pile. There are growing concerns, however, that the tools that would be used to combat a significant rise aren’t easily deployable.

Raising interest rates might have once been an obvious solution. But such a hike would create a lot of financial pain for the government, which has been banking on rock-bottom rates to fund its spending commitments. It needs the cost of borrowing to stay low to deliver them.

Chancellor Rishi Sunak has been preparing for circumstances to change – but in truth the country is not prepared for the consequences of a serious inflation surge, if it were to come. Younger generations have never experienced what it means to have prices skyrocket or their savings inflated away. They may soon learn the hard way.<//>

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