Falling inflation to give Bank greater leeway
INFLATION slid further in August, official data showed yesterday, easing some of the pressure on the Bank of England to raise interest rates.
The consumer price index slowed to an annual growth rate of 1.5 per cent in the year to August from 1.6 per cent in July, according to figures from the Office for National Statistics.
The Bank of England targets inflation of two per cent, traditionally raising interest rates when it fears it will rise above that level.
However, some economists believe it will take the unusual step of hiking rates in the coming months even if inflation is low, as the Bank is worried the economy’s rapid recovery could lead to a sudden surge in wages and prices.
“This was the case in 1999 and 2004 when rates were hiked with inflation below target and was also the case in March 2009 when the Bank of England launched its programme of asset purchases with inflation at 2.9 per cent.” said James Carrick, economist at Legal and General.
Although inflation is low and edging lower, core inflation – prices excluding energy and food – has hit two per cent in recent months.
Policymakers at Threadneedle Street are also in disagreement over the amount of slack in the labour market, an indicator the Bank’s monetary policy committee uses to judge when inflationary pressures may start to rise.
If there is not much slack, then inflationary pressures will begin rising. But if there is an ample amount, there will be plenty of room for further economic improvement without seeing prices rise.
Carrick is sceptical of the Bank’s estimation of labour market slack; his research shows companies are struggling to fill vacancies and slack is much less than generally believed – indicating inflation could pick up sooner than the Bank expects.