Rising inflation a measure of the policy dilemma for the Governor

Dr John Ashcroft, Chief Economist at Greater Manchester Chamber of Commerce

Commenting on inflation figures, John Ashcroft, Chief Economist at Greater Manchester Chamber of Commerce, said: “Inflation increased again in June to 2.9%, meaning Mark Carney, the new Governor of the Bank of England, narrowly avoided having to write a letter of explanation to the Chancellor explaining why the 2% target had been missed yet again. The Bank expects inflation to remain above target well into 2014 and with good reason.

“With CPI inflation averaging 3% since 2005 and service sector inflation averaging just under 4%, the real question is shall we see inflation at target within the new Governor’s period in office?

“Consumer price inflation in June increased to 2.9% from 2.7% in May; the increase was largely driven by an increase in clothing and motoring costs. Service sector inflation, accounting for almost half the index, increased by 3.5%.

“Producer prices also increased in the month. The rate of output price inflation increased to 2%. Input costs increased to over 4% (4.3%) from just under 2% last month. Food and energy costs were significant contributors to the price pressure.

“Rising oil prices will continue to place pressure on domestic inflation, as will a weaker currency, and there is little real evidence that a devalued Sterling is helping to rebalance the country’s economy toward exports. Whilst there may yet be a weakening of inflationary pressure in October when higher education fees fall out of the annual comparison, with even the Bank acknowledging that the target will not be met within this parliament, is it time to increase base rates? The Bank of England may express concern about the impact an increase in base rates may have on households, particularly those with high debt repayments, but with inflation rising ahead of earnings, real household incomes are already under severe pressure.

“Mark Carney faces a real policy dilemma, slow growth and rising inflation. It may well be time to leave the world of Planet ZIRP (zero interest rate policy) and begin to increase base rates.”