Inflation stability is the aim of the policy makers. It allows for certainty in business, anchors inflationary expectations and brings confidence back to households.
So the news that inflation has remained at 2.7% for the fourth month in a row is good news?
Of course there are some prices rising faster and some slower, but stability is good news in many ways. However at 2.7% it is 'above the 2% target, while still within the +/- 1% band that causes the MPC to explain themselves.
The greatest concern about 2.7% inflation is that earnings are going up more slowly. This means in real terms most people are worse off.
There are some other concerns. The inflationary pressure is mainly cost-inflation. Ironically some demand-pull inflation would have been nice as it would represent a return to growth. Also the recent devaluation of the pound will lead to higher import prices and this will feed directly into the CPI.
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Whilst it is good news that inflation is not rising above 3%, I personally would prefer to see it below the 2% target than above. It is important that wages should be rising above inflation in order to stimulate aggregate demand and finally give a boost to the stagnant economy. I also find it worrying that the cost of living is rising at a rate substantially above inflation, hitting the poorest hardest.
ReplyDeleteI’m pleased that inflation has managed to stay relatively stable: any volatile inflation would be a terrible blow to business confidence, which is already at an all time low and we can’t afford that. Frankly the fact that it is 0.7% higher than we would like it just isn’t too much of an issue compared to our other problems: we are at least staying roughly on target with this KPI. Instead I think we should be much more worried about the devaluation of the pound: if imports rise in price then people will be able to purchase less due to the income effect and this will not help the already low levels of demand in the economy, and this will feed into inflation because the average price level has increased.
ReplyDeleteInflation is currently at a stable rate, although it is slightly higher than we would like to be seeing it for now we should be relatively ok with the rate as all the time it is stable it is not increasing. However, the fact that incomes aren't rising at a similar rate to the rate of inflation is something which could cause concern. It makes it increasingly hard for people to be able to afford the goods they need when their real income is dropping. We need the level of inflation of wages to increase in order to boost demand in the economy, or supply will not be matched with demand for the products.
ReplyDeleteSascha Haigh