THE speed at which things continue to get worse on the inflation front is unfortunately somewhat dizzying.
That said, it still doesn’t seem to be getting enough attention from the Boris Johnson administration, which sadly seems out of touch with the scale of the problem and the day-to-day realities of ordinary people.
The latest projections from the Bank of England, released last week with its announcement that its monetary policy committee had raised UK base rates an additional quarter point to 1%, gave grim reading.
The Old Lady of Threadneedle Street now expects annual UK inflation on the consumer price index measure to top 10% later this year.
And the extent of the inflation problems seemed to be written in the fact that the MPC vote was split not on whether or not to raise benchmark interest rates last week, but on how much. .
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Three MPC members, Jonathan Haskel, Catherine L Mann and Michael Saunders, voted unsuccessfully for a half-point rate hike last week.
The other six members, including Bank Governor Andrew Bailey, opted for a quarter-point increase.
Of course, UK base rates remain extremely low by historical standards, but that’s cold comfort for people who have taken out large mortgages to buy property as property prices have soared, in particularly in the context of a general crisis in the cost of living.
Minutes from last week’s meeting state: “Three members preferred a 0.5 percentage point increase in the bank rate at this meeting. These members place more weight on continued strong demand, leading to risks that pressures on capacity, particularly in the labor market, will be greater over the forecast period than projected in the report. of May.
“These members also felt that monetary policy should lean heavily against the risks that recent trends in wage growth, corporate pricing strategies and inflation expectations in the broader economy become more firmly entrenched. .
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“Earlier policy tightening now would help bring inflation back to target in a sustainable way over the medium term and reduce the risks of a longer and costly tightening cycle later.”
The minutes also signal the prospect of further rate hikes.
They say: “Based on their updated assessment of the economic outlook, most members of the committee felt that some degree of further monetary policy tightening may still be appropriate in the months ahead.”
Annual CPI inflation was just 0.4% in February 2021. The annual CPI target set for the Bank of England by the Treasury is 2%.
In its monetary policy summary last week, the Bank said of its latest inflation forecast: “In the May report’s central projection, CPI inflation is expected to rise further over the remainder of the month. year, reaching just over 9% in the second quarter of 2022 and averaging just over 10% at its peak in the fourth quarter of 2022.
“Most of this further increase reflects higher household energy prices following Ofgem’s large price cap increase in April and the further large increase expected in October…The Expected rise in CPI inflation also reflects higher prices for food, basic goods and services.”
Energy regulator Ofgem announced in February an increase of £693 a year or 54% in the energy price cap for a typical dual-fuel customer, and this came into effect on April 1.
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ScottishPower chief executive Keith Anderson this week warned of the potential for another more than £900 price cap increase in October.
Things went from bad to worse, very quickly, on the inflation front.
The Bank of England’s February Inflation Outlook predicted that annual CPI inflation would peak at around 7.25% in April. This expected peak was about two percentage points higher than the Bank’s projection last November.
Annual CPI inflation in the UK rose from 6.2% in February to a new 30-year high of 7% in March. According to the old all-items retail price index, annual inflation fell from 8.2% to 9%.
The central bank said last week of the developments: “Underlying nominal earnings growth rose more than expected in the February report and is expected to strengthen in the coming months, given the further tightening of the labor market and upward pressure from rising prices. inflation.
“Companies generally expect to increase their selling prices sharply in the short term, following sharp increases in their costs, and many of them say they are confident that they will be able to rebuild at least part of their margins.”
Meanwhile, the Bank noted that “in the May report’s central projection, UK GDP (gross domestic product) growth is expected to slow sharply in the first half of the forecast period.”
He added: “This primarily reflects the significant negative impact of the sharp rise in global energy and tradable goods prices on the real incomes of most UK households and on the profit margins of many UK businesses.”
Clearly, huge inflationary pressures and a sharp slowdown in growth are a most unpleasant combination, and the Bank of England has pointed to the implications for the labor market.
The central bank pointed out last week that while the jobless rate was “likely to fall further slightly in the near term, it should pick up to 5.5% in three years given the sharp slowdown in demand growth.” .
This represents a steep and painful increase, with the unemployment rate by this International Labor Organization measure currently standing at 3.8%.
Rates of cost and price increases for Scottish businesses have been the highest since comparable records began in 1997, according to the latest Purchasing Managers’ Index (PMI) report from the Royal Bank of Scotland released on Monday.
With inflation soaring, interest rates rising, growth slowing and the unemployment front expected to worsen, the road ahead is difficult.
Times are tough for many UK households and businesses.
However, the behavior of the Johnson cabinet signals that Tory ministers either don’t realize the extent of the problem or don’t care.
There’s an exuberant tone, with plenty of populist overtures, but nothing substantial to help consumers and businesses battling the inflationary storm.
And, on the listed ship that is Blighty, Mr. Johnson looks a lot like Captain Oblivious.
