Is the spike in inflation a failure – or could consumers be faced with a “nasty surprise”? | Economic news

There are many reasons to be surprised by the latest inflation figures.

The consumer price index, which measures the cost of a typical “basket” of goods and services, jumped up from 2% in July to 3.2% in August.

Not only does this place it at the highest level in nearly a decade, but the monthly change from July to August is the biggest increase since the CPI was introduced as a price measure in 1997.

Please use Chrome browser for a more accessible video player

August: Governor of the BoE: the inflation problem will be “temporary”

It’s, in other words, big stuff.

But does it follow that inflation is always going higher?

The question is hardly trivial, given that an inflationary spiral, where prices are rising ever higher, is one of the great fears of all economists.

It was high inflation that contributed to economic instability and high unemployment in the 1970s, an ordeal from which it took many years, if not decades, to recover.

As with so many things in economics, it is possible to discuss both sides here.

On the one hand, much of the upward pressure on prices right now is as much a function of what happened last year as what is happening now.

bank of england
Inflation continued to rise faster and further than the Bank of England forecast would suggest.

Around the same time last year, the cost of lunch outings to restaurants across the UK had fallen dramatically due to the Chancellor’s Eat Out to Help Out program.

A year later, restaurant prices are no longer discounted, so there is what economists call a “base effect” pushing up the inflation index.

If that was all that was happening, one could be sure that inflation would eventually subside.

Indeed, this is probably the general message we will receive in the coming weeks from the Governor of the Bank of England, Andrew Bailey, who is now required to provide a letter explaining why the CPI is now one point higher. percentage to the Monetary Policy Committee’s 2% target.

He has always maintained that many of the effects of rising prices are temporary and that while inflation will rise further, it will fall next year.

The problem, however, is that the Bank has been repeating this argument for most of this year, but inflation has continued to rise faster and further than the Bank’s forecast would suggest.

Not so long ago, he predicted that prices would not rise more than 3% this year.

Now it looks like the CPI will hit 4% before the end of the year.

And when you look through this “basket” of different categories of goods and services, you see a lot of evidence of rising prices.

In most commodities like copper and steel, lumber and lumber, cement and masonry, food and drink, prices seem to be increasing much faster than usual.

And then there is the energy.

In recent months, wholesale energy prices – not just in the UK but across Europe – have risen gradually and then sharply.

Last week electricity prices having doped at the highest level ever.

There are many reasons for this: a shortage of gas and lower than normal wind speeds in the North Sea among them.

But the result is that we are facing big increases in electricity and gas bills in the months to come.

One could argue, again, that this is all temporary – that it will soon disappear from inflation data after about a year of high numbers.

But inflation can be worryingly “sticky”.

When prices are high for a long time, they tend to stay that way.

Just before stepping down as the Bank’s chief economist earlier this year, Andy Haldane warned he was worried, looking at prices across the economy, of a “bad surprise.” future.

These words should continue to resonate in Threadneedle Street and beyond in the months to come.

Back to top button