Inflation hits 4.4% - as February borrowing soars to record levels

A 28-month high for CPI, and a 20-year high for RPI - that's the latest shock inflation news. But will it really change the Bank of England's position?

by James Taylor
Last Updated: 19 Aug 2013
The latest inflation figures are out today, and they’re not pretty: the Consumer Prices Index jumped to 4.4% in February, its highest level since 2008, while the Retail Prices Index soared to 5.5%, its highest level since 1991. The assumption seems to be that this makes the Bank of England much more likely to hike interest rates, probably in May. But since Governor Mervyn King always said inflation would go up before it came down, it’s hard to see why these numbers (even though they’re worse than the City expected) are going to change his mind. Or even whether they should.

This is not to understate the significance of the inflation figures, of course. According to the Institute for Fiscal Studies, real household incomes may have fallen by 1.6% between 2008 and 2011. So you don’t have to be a mathematician to work out that if prices are going up by 4-5% at the same time, we’re going to feel a lot poorer – particularly since the biggest factors behind the latest jump in inflation were staples like clothing, fuel and food, which we can’t really do without.

It also piles more pressure on the Bank of England. With inflation shows no sign of heading back towards its supposed 2% target (remember that?), the market now seems even more convinced the MPC will have to hike interest rates before too long (hence why the pound is up this morning).

However, King and co may beg to differ. The Governor has already said that he expects inflation to keep rising for a while yet, thanks to external shocks like higher fuel and commodity prices, before falling back again due to the fundamental weakness of the UK economy. So today’s data are perfectly consistent with his previous position. There’s also the question of whether it would make any difference; higher rates wouldn’t hold down the oil price, for example. And so far, Merv has given short shrift to the idea that the MPC should raise rates almost for symbolic reasons, just to show it cares (quite rightly, we’d argue).

Still, high inflation hurts – and not just for us wage slaves. If take-home pay is declining, that means the Government collects less money in tax – yet benefits are linked to inflation, so that bill will keep rising. That’s bad news for the public finances. The latest borrowing figures, also released today, show that public sector net borrowing hit a record high for February of £10.3bn, well up on the £8.1bn borrowed this time last year and a couple of billion more than economists expected. As well as casting some doubt on the Item Club's prediction yesterday that this year's borrowing total would be well below forecasts, that presumably makes it even less likely that George Osborne will splash some cash on a nice juicy Budget giveaway tomorrow...
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