We’re buying less, our wages aren’t going up much and retailers are having a hard time of it, but inflation marches on, hitting a five-year high of 3.1% in November and sticking resolutely at 3% for the next two months.
Shop prices fell again in February, down by 0.8%, according to figures from the British Retail Consortium out today. Food prices were up as usual; non-food prices down. Overall prices have been deflationary for nearly six years now.
Retail sales volumes were up all of 0.1% in January, mainly due to people’s New Year resolutions to get fit. But this enthusiasm had waned by February with GfK’s consumer confidence index down. Joe Staton, head of experience innovation UK at GfK, said: “Consumers have good reason to feel jittery and depressed.”
Average wage growth at 2.5% is still lagging price growth, meaning real income is going down.
So that leaves the Brexit vote hangover as the dominant force driving UK inflation, with the weakened pound still driving the rate up.
Earlier this month the governor of the Bank of England, Mark Carney, had to write to the Chancellor to explain why inflation had missed the 2% target by more than one percentage point.
In his letter to Philip Hammond, Mark Carney points to Brexit as being the major cause of persistent inflation.
Carney says: “Sustained above-target inflation remains almost entirely due to the effects of higher import prices that resulted from the depreciation of sterling following the vote to leave the European Union.”
He added that the rate might rise temporarily above 3% again to reflect higher oil prices, before being expected to fall back gradually as the effects of past depreciation of sterling on inflation lessen.
When the MPC raised the interest rate in November they said they were in no hurry to raise interest rates again. Now they have muddied the water.
The MPC’s February inflation report said that, “were the economy to evolve broadly in line with its February inflation report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than it anticipated at the time of the November report, in order to return inflation sustainably to the target”.
This was backed up by the Bank of England’s chief economist Andy Haldane telling the Treasury Committee that: “Historically the thing that has really killed jobs has been central banks stepping on the brakes too late.”
The formerly dovish MPC member, Sir Dave Ramsden, has also hinted at an earlier rate rise. Talking to the Sunday Times this weekend he said: “relative to where I was, I see the case for rates rising somewhat sooner rather than somewhat later”.
A Reuters’ poll showed that 32 out of 57 economists tipped the bank rate to rise in May following the more hawkish tones.
But a rise in unemployment figures has contradicted the Bank of England’s view that the economy is beginning to overheat.
David Blanchflower, a former member of the MPC, writing in the Guardian, said an early rate rise did not make sense: “You don’t raise rates, which causes unemployment to go up, when unemployment is already rising.”
This view that rates will go up later rather than sooner is backed up by Samuel Tombs, chief UK economist at Pantheon Macroeconomics. He says that inflation looks like it is “set to fall swiftly” and therefore “we continue to see only a 40% chance of the MPC raising interest rates in May and anticipate just one hike, in August, this year.”
Homeowners and would-be homeowners seem to think the rate will rise soon, with the number interested in fixed-rate mortgages increasing. Figures from Experian show the percentage of searches for fixed-rate mortgages in February at 67.4%, up from December’s figure of 60.3%.
With domestic pressures on inflation low, the weakness of the pound still looks to exert a major force. November’s rate may be the peak or it may turn out to be just the highest peak in a high range of mountains. The release of the new inflation figure on 20 March should go some way to indicating that and whether a May adjustment is on its way.