Fear not: there is little risk of inflation breaking loose | Philippe Inman


NOTNext month, the Bank of England could start the long road back to higher interest rates. Many financial traders believe the comments and speeches of Governor Andrew Bailey and some of his colleagues make this a likely possibility.

If that doesn’t happen in November, the central bank’s Monetary Policy Committee (MPC) will meet again in December to review the economy. It could then be that the group of nine people take on the role of the Grinch, stealing the Christmas cheer with an increase in the nation’s cost of borrowing.

Huw Pill, a member of the MPC and chief economist of the Bank of England, said he expected inflation to hit 5% next year. His remarks followed comments from Bailey, who said the bank “should act” to ease inflationary pressures.

Just a week ago, financial markets bet on rate hikes at both meetings, raising the current base rate from 0.1% to 0.5%.

Fears that runaway inflation would persuade workers to demand windfall wage increases, which in turn would fuel further inflationary pressures, are the impetus for action.

It was never clear how higher interest rates would influence the decision-making of consumers and businesses in the midst of a pandemic. A generous interpretation could be that it could discourage spending, reduce demand for scarce goods, and bring inflation down quickly before expectations of a longer-term problem of rising prices take hold.

Mortgage customers who have opted for variable or tracker loans have been shocked by the obvious threat of rising rates. Bank of England figures show a wave of remortgages in September, largely on fixed rate loans. And who could blame them when the financial markets were almost hysterical in their speculation about an anticipated UK rate hike?

Corn on the contrary, as Del Boy would say: an increase in the cost of credit is now as likely as the hero of Only fools and horses understand French.

Danny Blanchflower, Ivy League university professor and former MPC member, said a rate hike was always going to be “a stupid mistake.” With the worsening economic outlook, it has become an obviously stupid mistake, he says.

To give credit to two committee members – Silvana Tenreyro and Catherine Mann – they have never been on the side to advocate for a stricter policy. Tenreyro is the former LSE economist who joined the MPC in 2017 for the usual three-year term and was reappointed last year, while Mann joined a Wall Street bank this summer after stints at the White House and as chief economist of the OECD in Paris. They made it clear that the economy needed central bank support throughout the pandemic, with low-cost credit, and that the hardships faced by businesses and workers are far from over. Rising infection rates and falling consumer confidence support their point of view.

And these are not the only factors. On Friday, the Office for National Statistics said retail sales fell for the fifth consecutive month in September. A survey of factory owners found production stagnated this month, after a period of slow growth dating back to March.

While the service sector is experiencing strong growth, it is doing so after many companies have been swept away by the pandemic. There is bound to be strong growth in times of recovery. The same can be said when Chancellor Rishi Sunak boasts that the UK economy is growing at the fastest rate in the G7: he forgets to mention that last year the UK economy contracted at the pace of the G7. faster of the G7.

It is difficult to know which direction to take when there is a global shortage of goods from the Far East, much of which is stranded in container ports where Covid outbreaks have forced authorities to redirect ships. to other places. Who can say when this will end?

Brexit means there are also skills shortages in crucial industries, many of which are looking to attract workers with higher wages. However, there is no sign of a spiraling wage spiral of the kind that could send inflation into the stratosphere next year. Salary settlements are 2% and average salary increases, including promotions and bonuses, range from 3.5% to 4%.

Bank officials will also review Sunak’s spending plans. As it distributed over £ 400bn during the pandemic, it began to cut back that support – evidenced by the reduction in Universal Credit worth £ 1,000 a year to applicants and the series of tax increases planned for next year. Tax hikes and benefit cuts will cut household spending without the central bank moving a muscle.

No doubt this week’s budget will be a multibillion-pound giveaway billed to solve climate change, regenerate cities in distress and level regions. Nothing will mask its overall deflationary effect – signaling the end of the rate hike chatter.

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