Bank of England will not take foot off throttle despite drop in inflation
The drop in inflation from 10.1% in July to 9.9% last month is not going to trouble the Bank of England’s policymakers when they meet next week to set interest rates. Its monetary policy committee (MPC) is on a mission to increase the cost of borrowing to bring down inflation to 2%. Prices growth that sticks at almost 10% is still too high. One month’s figures are not a trend.
The nine MPC members will also ponder several other developments at home and abroad that can be considered reasons to increase interest rates.
Top of the list will be the government’s £150bn energy subsidy scheme, which will benefit millions of people who, many have argued, don’t need to be cushioned from the gas price shock.
Better-off households are more likely to spend the money on imported items that are in short supply, thereby forcing retailers to increase their prices further. Higher interest rates will feed through to monthly mortgage bills and persuade them to rein in their spending. At least that’s the theory.
Wages are another subject of concern for the Bank’s rate-setters. In July, wages growth increased to 5.2% from 4.7% in June. These figures may be well short of the inflation rate and reveal the worst squeeze on living standards in two generations, but they still worry the MPC, which fears higher wages will trigger higher prices in years to come when other business costs have calmed down.
James Smith, an economist at ING, said the home energy price cap fixed at £2,500 would prevent inflation from going above 11%. “However, the Bank of England is watching wage growth more closely, as the hawks worry that worker shortages could lead to core inflation staying more persistently above target,” he added.
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