If inflation seems high now, look what’s coming
The target for UK inflation is 2 per cent. In June it was admitted price rises had reached the 3 per cent trigger that requires a Bank of England letter. The July consumer prices index annual change exceeded 4 per cent.
By next month, however it could be 5 per cent. Perhaps the best we can hope is for that milestone to be delayed a month.
The key to this galloping inflation is food. It ought to fall in price during the summer, bringing down the whole consumer prices index, but this year it has continued rising.
Over the past decade, 2006 was the only previous year when food and drink prices rose in July: this year they rose for the 12th consecutive month rather than fall for seasonal reasons. Food and drink prices are now 11.2 per cent higher than a year ago.
The result is that the main CPI index was unchanged in July when in most years since 2000 it has fallen.
That is a bad base for coming months. Even though oil and commodity prices are falling, factory gate inflation of more than 30 per cent means there are past price rises still to feed into retail prices. Firms that held off have now become brave or desperate enough to try increasing their selling prices.
Even though food is inflating inflation, non-food suppliers see the index rise as an excuse for raising their prices and margins.
The old RPI reached 5 per cent in July and RPIX, the measure that excludes mortgage payments, has soared to 5.3 per cent. Now the chosen index (chosen because it is lower) is ready to reach that threshold too.
If the CPI rises by 0.9 points (0.85 per cent) in August then we have 5 per cent retail price inflation. Seasonal foods might still save us from that, but if September’s index is just 1 point above July’s index level of 109 (0.95 per cent over two months), then the threshold will have been reached with pressure on pay claims, pension payments and suppliers’ costs.
As this blog noted recently, inflation above 5 per cent is more likely than interest rates below 5 per cent. And negative real interest rates mean it is better to spend than save.
