Inflation: Running hot and causing hardship

ITV News Business and Economics Editor Joel Hills reports on the relationship between rising inflation and consumers being hit by the increase in energy, fuel and clothing costs

The Bank of England needs a new crystal ball.

Last month, when the headline of inflation sat at 3.1%, the Bank predicted inflation would peak at 5% in April 2022 before falling again.

It’s December, 5% has been breached already and inflation is set to burn even brighter before it fades.

This morning, the ONS announced that a broad range of price rises in November - the pump price of petrol and diesel, household energy bills, clothing, footwear, food, drink and tobacco - pushed CPI to 5.1%.

It’s all but official: prices are rising faster than pay and - barring an Omicron-shaped curve-ball - they will accelerate further in the months to come.

There’s plenty of inflation in the pipeline. Manufacturers say the raw materials they use continue to get dearer. Gas and electricity bills are expected to jump again in April when OFGEM sets the price cap, allowing energy suppliers - some of whom are struggling to stay in business - to pass on more of their costs.

How should the Bank of England respond? Its job is to protect the spending power of the pound in your pocket, which is currently being rapidly diminished.

Raising interest rates on Thursday would not address any of the causes of inflation. It won’t unblock global supply chains, make gas cheaper and more plentiful or conjure up staff for business with recruitment headaches. It would send out a strong signal that the Bank is serious about bringing inflation back to its 2% target in the medium term.

Will the Bank of England raise interest rates when it makes an announcement on Thursday? Asks Joel Hills

The anxiety here, in economist-speak, is that inflation becomes “embedded” and the public expectations becomes “de-anchored”.

In plain English: if people start to believe that inflation is out of control then there’s the risk of a spiral of climbing prices and wages.

This morning, the UK’s largest union is demanding above inflation pay rises to protect the living standards of its one million members.

“Workers did not create this cost-of-living crisis so why should they pay for it?” asks Sharon Graham, Unite’s general secretary.

The union says it will “fight” for pay increases of at least RPI - a different measure of inflation - which rose to 7.1% in November.

In truth, there’s little sign of a wage-price spiral emerging until now. Nominal wage growth (excluding bonuses) fell from 4.1% in September to 3.8% in October. The labour market in the UK is tight, it does not appear to be running hot.

However, high inflation hurts and it hurts those on the lowest incomes the most.

This morning, the chancellor is offering tea, sympathy and advertising the £4.2 billion the government is spending to support the vulnerable, in the form of duty freezes, universal credit and work allowances.

Labour wants him to do more. The party has called on the government to scrap VAT on energy bills, doing so would probably save the average household £85 a year.

In theory, the Bank of England’s next move seems obvious. In practice, the emergence of Omicron makes everything very tricky.

The spread of the variant could nudge inflation sharply in either direction, depending on its severity.

Raise interest rates too soon and there’s a risk of puncturing the recovery, tarry too long and prices may surge again. What’s a central bank to do?