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IEA - Inflation shock means policy-makers have more work to do

Julian Jessop, Economics Fellow at free market think tank Institute of Economic Affairs commented on today’s inflation figures

“The jump in the headline measure of UK inflation to 11.1 per cent in October, from 10.1 per cent in September, emphasises the need for policy-makers to get a grip of the cost of living crisis.

“The increase last month was driven by higher food and energy prices. Excluding these items, ‘core’ inflation was unchanged at 6.5 per cent. But that is still a relatively high rate, and no consolation for those struggling to pay essential bills.

“The inflation rates for low-income families can also be far higher than the national average, because they typically spend more of their budgets on food and energy.

“In the short term, the government should continue to target support at the most vulnerable households, including additional cost of living support payments. But this can only be a temporary fix.

“The government should also do much more to address the supply-side problems that have contributed to higher prices for everything from energy and housing to childcare. Low levels of business investment have undermined productivity and added to cost pressures too.

“The Bank of England has more work to do as well. Obviously there is little that central banks can do about the external shocks that have driven up food and energy prices. Nonetheless, monetary policy has been too loose for too long and the Bank still needs to return interest rates to more sustainable levels. This would be less painful than the alternative of allowing a temporary inflation shock to persist for even longer.

“But there are good reasons to think that interest rates will not have to rise much further. Headline inflation should now be close to peaking (depending in part on what happens to the energy price cap in April) and should fall dramatically next year.

“Monetary growth has already slowed sharply and the Bank has finally begun the process of selling back government bonds bought under the policy of ‘quantitative easing’.

“With the global economy sliding into recession and pipeline price pressures starting to fade, UK official interest rates probably only need to rise from 3 per cent to around 4 per cent. This would be lower than the 5 per cent or more that some fear and lower than currently priced in to the mortgage market.”

Consumer price inflation, UK: October 2022

Original article link: https://iea.org.uk/media/inflation-shock-means-policy-makers-have-more-work-to-do/

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