UK consumer price inflation jumped to a 22-month high of 1% in September, from 0.6% the previous month. Economists had predicted a smaller increase to 0.8%.
The obvious explanation is that the effects of a weak pound are starting to come through more forcefully. Yet the biggest contributor to the rise in CPI inflation was clothing, and in its report the ONS raises some doubts over whether price increases in this sector were related to exchange rate movements.
Nevertheless inflation looks certain to rise further over the coming months, and could easily exceed the 2% target in 2017. This will undoubtedly be tough on those with low incomes, and it’s also not good news for savers who are losing money in real terms.
However we need to remember that sterling’s drop, assuming it doesn’t continue to plummet, is a one-off factor, which will fall out of the year-on-year calculation in twelve months’ time. Mark Carney indicated last week that the MPC would ‘look through’ what should be a temporary bout of inflation and keep monetary policy loose to support the economy. In the aftermath of the financial crisis the Bank of England was prepared to tolerate a spike in inflation to more than 5% while leaving rates at rock bottom.
The bigger picture is that structurally there are very few inflationary pressures – due in part to demographic reasons. The baby boomers are starting to retire in their droves. They have already gone thorough their consumption phase – they have bought their houses, cars and consumer goods. The generation behind them is saddled with debt and struggling to get on the housing ladder. There is also no sign of any tightness in the labour market, with wage growth seemingly set to remain depressed. All this should mean less inflationary pressure, lacklustre economic growth, and little upward pressure on interest rates.
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