Inflation is coming down, with the Consumer Price Index at 3.2 per cent, and that’s good. It will come down further this summer, probably to the Bank of England target of 2 per cent. That will certainly lead to a cut in interest rates, as the Bank Governor, Andrew Bailey, confirmed on Wednesday.
But do not expect rates to come down by much. That will be a relief for savers, and particularly for elderly people who rely on those savings to bump up their pensions. But relatively high interest rates will be a continuing burden for the young trying to buy their first homes, and indeed save for their own pensions too.
To many people, this will seem unfair. If inflation gets back to 2 per cent and the Bank makes only tiny cuts to rates, that will upset a lot of people. So why is this likely to happen?
Inflation is a strange old beast, and even central banks – not just in the UK but in America and Europe – got it very wrong. They badly missed the warnings a couple of years ago that it would shoot out of control. But right now it is helpful to see it as having two faces – what is happening to price of goods and what is happening to the price of services – for they are behaving in different ways.
Goods prices are barely rising at all. On the Office for National Statistics preferred measure of inflation, which includes the costs of owner-occupied homes, goods were up just 0.9 per cent on a year ago. But services were up 6 per cent. Since we spend more on services than goods (including government services, they account for 81 per cent of GDP) that is a huge problem. Inflation is not back in its cage.
It is easy to see why. The largest single cost in most service industries is wages, and they are still rising at a decent rate. The latest figures came out on Tuesday, and they showed that regular earnings in the private sector were up 6 per cent on a year ago. In the public sector the increase was fractionally higher at 6.1 per cent.
While that is quite understandable as people try to recoup the losses to their real incomes that have come from the inflation over the past two years, the harsh fact remains that if the cost of labour continues to rise at anything like that rate, the cost of services will too. The likely outcome is that while inflation will indeed come down in the summer, it may start to rise again later in the year and will get stuck at 3 per cent, maybe more.
At least that is what the central bankers fear, and not just here in the UK. On Tuesday, Jerome Powell, chair of the US Federal Reserve Board, warned that Americans might have to wait longer for cuts in rates. “Recent data have clearly not given us greater confidence” that inflation was coming fully under control, he explained. Instead, the data “indicate that it’s likely to take longer to achieve that confidence”.
“If higher inflation does persist,” he continued, “we can maintain the current level of interest rates for as long as needed.”
The markets interpreted that to mean that the Fed would not cut interest rates until September. That does not mean that the UK won’t cut rates until then either, but it would make it more difficult to do so. US inflation is running at 3.5 per cent, so a tiny bit higher than here. But unless our underlying inflation – not just the headline figure – is significantly lower it would be tricky to explain to the markets why rates were coming down.
As Liz Truss discovered, it is vital to keep global financial markets on side. No one wants a run on the pound or a surge in yields on the gilt market. So as far as our interest rates are concerned, it looks like “higher for longer” here too.
Does this matter? Well, no and yes. No, in as far as the economy seems to be managing reasonably well despite the current cost of money. It is growing again, after a brief recession at the end of last year. The housing market is stable, with the Land Registry showing that year-on-year prices were down just 0.2 per cent. The country has learned to live with higher interest rates.
But it would be a worry nonetheless, for two main reasons. One is that while the country as a whole seems to be coping, there will be many people and smaller businesses that are just about hanging on, and do desperately need rate cuts fast.
The other is inter-generational equity. Just as the long period of near zero interest rates hit the old and helped the young, now the reverse is happening. Economics, sadly, are often not fair, but let’s leave economics aside. There are solid social reasons for hoping that Andrew Bailey’s optimism that “cuts are on the way” will
Inflation falls and yet again the boomers are winning
8
0
17.04.2024
Inflation is coming down, with the Consumer Price Index at 3.2 per cent, and that’s good. It will come down further this summer, probably to the Bank of England target of 2 per cent. That will certainly lead to a cut in interest rates, as the Bank Governor, Andrew Bailey, confirmed on Wednesday.
But do not expect rates to come down by much. That will be a relief for savers, and particularly for elderly people who rely on those savings to bump up their pensions. But relatively high interest rates will be a continuing burden for the young trying to buy their first homes, and indeed save for their own pensions too.
To many people, this will seem unfair. If inflation gets back to 2 per cent and the Bank makes only tiny cuts to rates, that will upset a lot of people. So why is this likely to happen?
Inflation is a strange old beast, and even central banks – not just in the UK but in America and Europe – got it very wrong. They badly missed the warnings a couple of years ago that it would shoot out of control. But right now it is helpful to see it as having two faces – what is happening to price of goods and what is happening........
© iNews
visit website
login
who are we?
contact us
qosheapp
Toi Staff
Gideon Levy
Belen Fernandez
Andrew Mitrovica
Mort Laitner
Rami G Khouri
Ali Fathollah-Nejad
Nikkei Editorial
