The UK inflation figures provided the government with some much needed good news. At 7.9%, down from last month’s 8.7%, the rise in the cost of living came in below the expected rise of 8.2% but remains higher than in other developed economies. The eurozone rate is around 2.5% below the UK’s and, indeed, the US has seen inflation fall to an annual rate of just 3%. While markets greeted these numbers with modest enthusiasm, they are still not the sort of figures that will deter more wage demands and industrial action from those who feel disadvantaged.
Fuel costs have actually fallen, but food price inflation, while down on the previous month, is still over 17%. While the price of oil and gas on the commodity markets have fallen significantly in price, the cost to consumers has rather lagged the drop in wholesale markets. Little wonder, then, that the Chancellor of the Exchequer is taking an interest in how petrol companies conduct themselves. The term “Rocket and Feather” has been applied to their pricing policies, with prices rising like a rocket, but only falling like a feather.
Might this modest improvement in our inflation experience allow the Bank of England to stay its hand in rising interest rates? I rather doubt it, though perhaps the August hike might be scaled back to a modest 25 bps, rather than the half percentage point presently expected. Not that this will help hard pressed borrowers much. Nor savers, for that matter. Banks have been keen to raise the cost of borrowing as the Bank of England push up interest rates, but have been much slower to increase the rates to savers. I can attest to this as someone whose borrowing days are over, but with savings still attracting only modest returns.
The risk with higher interest rates is that we might be pushed into the recession we have so far avoided. There will be those charged with carrying out monetary policy that will believe a recession is just what we need to bring the inflation rate down. But economic wellbeing is likely to trump the cost of living in the political debate. With speculation rife that the Prime Minister will opt to go to the country earlier than forecast – perhaps in the autumn – he will doubtless be balancing these conflicting issues. In the meantime we should all sit back and enjoy the holiday season and be thankful we are the right side of the Jet Stream, so avoiding the very high temperatures.