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Inflation inflates again, to 4.4%

London, UK (16/08/2011)

LONDON (Management Today) After a brief drop last month, inflation's up again. But the Bank of England says there's not much it can do.

Bad news from Threadneedle Street this morning, as the Bank of England published figures showing consumer price inflation rose to 4.4% in July, up from 4.2% the month before and 0.1% higher than analysts had expected. That means another awkward letter from BoE governor Mervyn King to the Chancellor (his seventh in a row, if anyone’s been counting) explaining why inflation is so much higher than its 2% target. And, since King insists there’s not much the Bank can do about it, it looks like costs will carry on going up.

Inflation is a many-headed beast: thus, while CPI is 4.4%, the retail price index (which includes housing costs and is often used as a benchmark for wage deals) stayed flat at 5%, and core inflation, which strips out volatile factors like food and fuel, rose to 3.1%, from 2.8% in June. Whichever measure you choose, the Bank said it was largely driven by an increase in rental costs, and the fact that many retailers had their summer sales in June instead of July, thus driving up the year-on-year cost of clothing.

The Bank insists there’s not much it can do about it. The cost of raw materials (like cotton and food – although oil prices have, mercifully, dropped recently) are rising, while the debt crisis in Europe hasn’t done much to help. And the surprise drop in German growth figures (by 0.1%) published this morning will hardly calm the panic on the markets. It shouldn’t affect UK inflation directly, but as equity markets become less stable, investors turn instead to commodities, pushing up prices, which then nudge up the cost of raw materials for manufacturers, thus increasing inflation. Brilliant.

So as expected, UK consumers aren’t terribly happy about the situation – particularly considering they’ve also been told that rail fares are due to rise 8% as a result of today’s figures. That’s because the maximum permitted annual rise is pegged to RPI (the wrong kind of inflation?), plus 3%. Obviously, considering the train network’s general ineptitude, that’s caused plenty of outrage – but on top of the 15%-or-so price rises announced by energy companies last month, it’s a recipe for disaster. Expect the next gang of looters to include outraged commuters trying to bag themselves a season ticket… 

So chances are the Bank will come under increasing pressure from the likes of Nick Clegg (who said today it’s a ‘tough time’ for many people. Understatement, much?) to find a way to ease the pressure on consumers. In his letter today, King reminded the Chancellor the Bank still has two cards up its sleeve: raising interest rates, or quantitative easing. Although, given that the factors affecting inflation are external, its best option may be to sit tight. The good news, added King, is that high inflation is ‘temporary’ – and should peak at 5% later this year, before falling. That said, he’s been using that word for the past couple of years. So just how temporary ‘temporary’ is, is another question…

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