WIREDGOV

Julian Jessop, Economics Fellow at the Institute of Economic Affairs commented on the latest inflation figures

“The jump in UK inflation from 3.0% to 3.3% in March is bad news but not quite as bad as some feared (the Bank of England expected the rate to be “close to 3½%”).

“Moreover, this jump can be entirely accounted for by the increases in transport costs (mainly motor fuels), which is hopefully a one-off.

“The Bank’s Monetary Policy Committee may also be reassured by the news that core inflation (excluding food and energy) ticked down from 3.2% to 3.1%.

“Nonetheless, these numbers are too high for comfort, and the headline rate is moving even further away from the MPC’s 2% target.

“This is also just the early stages of the latest inflation shock. It will take several months for the jumps in the costs of fuel and other commodities to be passed through in full to the prices of other goods and services.

“It is also too soon to judge whether there will be any other second round effects, notably a sustained increase in inflation expectations.

“In the near term, inflation will probably fall back in April, reflecting the reduction in this month’s Ofgem cap on domestic energy bills and some favourable effects from other regulated prices.

“But pipeline pressures are building elsewhere and, unless the government intervenes further, the Ofgem cap is going up again in July.

“That said, two factors should prevent inflation from taking off – and mean that the Bank of England can keep interest rates on hold despite the inflation risks.

“First, demand is weak. Firms have little pricing power, other than on essential goods and services, and the softness of the labour market means that wage growth is likely to remain subdued.

“Second, the supply of broad money (specifically, “M4ex”) has been growing at an acceptable pace of around 4%. This means that increases in the prices of the goods and services most affected by the Iran war are more likely to be offset by falls, or smaller increases, in the prices of others.

“In contrast, growth in broad money peaked above 15% in 2021 as the Bank of England monetised the surge in government borrowing during the pandemic. This then helped to fuel the spike in inflation in 2022 as energy prices jumped following Russia’s full scale assault on Ukraine.

“In short, unless the Middle East crisis escalates further, UK inflation will probably be capped at around 4% this year and then fall sharply next year.

“But this is still a major shock, with the economy set to flatline at best in the second quarter and possibly the third too.”