Food price rises and the folly of inflation targeting

New figures released this morning show that while above target inflation stays at 2.7 per cent in the year to September, food inflation is at a much higher 4.8 per cent. According to Shore Capital that's a 0.1 percentage point increase in the annual rate from August. Price rises in meat, vegetables and fruit were higher than in the previous month.

Meat inflation now stands at 5.2 per cent, vegetables at 6.9 per cent and fruit at a staggering 11.3 per cent. Fruit has now experienced double-digit inflation in seven of the past nine months.

While targeting a consumer price level of two per cent, the Bank of England looks at the aggregate price level - the one now at 2.7 per cent. So while some components will clearly be above target (such as food), other areas see falling prices. The latter can be hard to spot, but see consumer electronics. Your £100 will buy a much better television today than it would have five years ago.

So in order to meet its target, the Bank's Monetary Policy Committee sometimes has to pump up or reduce demand to compensate for the great productivity increases we're seeing in tech. The inflation level doesn't incorporate how much of the price change comes from demand, and how much from productivity, and Bank policy would ideally reflect that.

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