Dip in inflation shouldn’t let the Bank of England off the hook, says IEA expert
Julian Jessop, economics fellow at free market think tank the Institute of Economic Affairs, commented on the latest ONS inflation figures
“The small fall in UK inflation in August is welcome, but it is far too soon to sound the all clear. The headline rate remains close to 10 per cent and food price inflation is still rising.
“The Energy Price Guarantee means that consumer price inflation will probably peak at around 11 per cent in the coming months, before falling sharply next year. The latest producer price data also add to evidence – from business surveys and commodity markets – that pipeline pressures are easing.
“Nonetheless, the Bank of England has more work to do to get inflation back down to the 2 per cent target. Obviously the Bank cannot influence global energy prices, or prevent supply shocks. But the long period of very low interest rates and money printing has added fuel to inflation and allowed inflation expectations to take off.
“The Bank’s Monetary Policy Committee therefore needs to be bolder to restore credibility. Raising rates by 75 basis points at the rescheduled meeting next week, rather than the expected 50 basis points, would still leave rates at the historically low level of 2.5 per cent. However, it would send a stronger signal that the Bank is serious about getting inflation back down over the medium term.
“It is also important that the Bank presses ahead with plans to begin selling its holdings of UK government bonds (‘gilts’). There have been suggestions that the Bank might delay the start of active ‘quantitative tightening’ in order to help finance the increase in government borrowing. However, any backtracking here would simply reinforce the impression that the Bank has lost focus on its primary job of controlling inflation.”
Notes to editors
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Further IEA research on the threat of inflation can be read here.
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