However, there is some good news. The factors that drove inflation have been reversed. Supply-side pressures owing to the pandemic and war have gone and monetary policy has tightened. Thus inflation will decelerate and boost spending power as real incomes rise.
Importantly, wages and excess demand were not the drivers of inflation. Wages are playing catch-up with a deterioration in living conditions that has engulfed Western Europe since the 2008 crisis.
However, we know from experience that second-round effects can ensure inflation’s persistence. These include wage increases in excess of productivity, companies’ pricing power and higher inflation expectations. Hence the Bank of England, with a self-made credibility gap, has a bias to tighten.
Data over the last week suggest that it is time for a shift in the policy debate. The economy is weak and policy ought to focus on averting recession and challenging consensus-thinking on how to boost future growth.
The Office for National Statistics (ONS) outlined that core inflation is trending down but is still high. It was 6.8pc in July versus 7.3pc in May.
Also, the latest monthly data showed the budget deficit falling more quickly than expected, but it too is still high. Notably, in July, tax receipts were £65.6bn and £3.9bn above a year earlier, boosted by inflation and the economy’s continued resilience.
While both core inflation and budget deficit statistics can be interpreted in different ways, improving but still poor, there was no hiding from the other news, which was disappointing.
The composite Purchasing Managers Index (PMI) that covers services and manufacturing fell to a 31-month low in August, and into recession territory. Not that it is any consolation, but the PMIs show a worse picture in the euro area.
Significantly, the UK’s services sector is slipping into recession and the CBI Distributive Trades survey showed a slump in retail sales in August.
Britain has a rare chance to break its cycle of decline
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However, there is some good news. The factors that drove inflation have been reversed. Supply-side pressures owing to the pandemic and war have gone and monetary policy has tightened. Thus inflation will decelerate and boost spending power as real incomes rise.
Importantly, wages and excess demand were not the drivers of inflation. Wages are playing catch-up with a deterioration in living conditions that has engulfed Western Europe since the 2008 crisis.
However, we know from experience that second-round effects can ensure inflation’s persistence. These include wage increases in excess of productivity, companies’ pricing power and higher inflation expectations. Hence the Bank of England, with a self-made credibility gap, has a bias to tighten.
Data over the last week suggest that it is time for a shift in the policy debate. The economy is weak and policy ought to focus on averting recession and challenging consensus-thinking on how to boost future growth.
The Office for National Statistics (ONS) outlined that core inflation is trending down but is still high. It was 6.8pc in July versus 7.3pc in May.
Also, the latest monthly data showed the budget deficit falling more quickly than expected, but it too is still high. Notably, in July, tax receipts were £65.6bn and £3.9bn above a year earlier, boosted by inflation and the economy’s continued resilience.
While both core inflation and budget deficit statistics can be interpreted in different ways, improving but still poor, there was no hiding from the other news, which was disappointing.
The composite Purchasing Managers Index (PMI) that covers services and manufacturing fell to a 31-month low in August, and into recession territory. Not that it is any consolation, but the PMIs show a worse picture in the euro area.
Significantly, the UK’s services sector is slipping into recession and the CBI Distributive Trades survey showed a slump in retail sales in August.
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