Inflation busts 2% target for the ninth month in a row

Inflation has remained at 3.1% for the second month in a row - despite signs of a slowing economy.

by Emma Haslett
Last Updated: 06 Nov 2012
Like those cartoon henchmen who refuse to die, inflation in the UK has stubbornly refused to drop, sticking at 3.1% August – the sixth month in a row that it has been above 3%. The figure may have dropped from 3.7% earlier in the summer, but it’s still way above the Government’s 2% target.

It’s a bit of a worry for the UK’s fragile economy, but the consequences of a rise in interest rates just now might be worse. Whatever happens, it’s an indication that recovery may not be going quite as well as we had hoped.

The figure has once again come as something of a surprise to economists, who had expected inflation to fall to 2.9%. Some of the blame can be placed on matters outside our control: floods in Russia and Pakistan have led to higher wheat prices, which have driven up food prices in the UK, while the price of clothes and travel have also risen. But it’s telling that the consumer prices index, which excludes volatile elements like food and energy, also didn’t budge – so the figure isn’t all down to expensive plane tickets.

The Bank of England, which is in charge of interest rates, has so far avoided the temptation to raise them, ostensibly because it will push the price of borrowing up. So far, Mervyn King, the Bank’s chief, has maintained that, because the jobs market is so fragile, workers will be unwilling to ask employers for higher wages, despite the higher prices. So it follows, says King, that high inflation is temporary and will go away of its own accord.

It’s a difficult decision for the Bank, though, particularly because we’re less than a month away from the toughest spending cuts of a generation, which are likely to make the economy even more delicate. But while King has a point – and we can all congratulate ourselves for behaving with due regard to the macro-economic circumstances – this self-imposed wage suppression won’t last forever. As soon as there is a sniff of proper recovery, wages will start to rise and all those inflationary external risks will rise up to bite us.
 
The next decision from the Bank’s Monetary Policy Committee, which controls interest rates, is due on October 7. Considering that they haven’t moved the rate for months, we await this meeting with a surprising degree of anticipation.

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