Inflation figures a blip, but a blow too

The CPI figure rose last month to 3.5% (from 3.4%). The Bank of England has been saying that there was a danger of being below the 2% target by the end of the year and this is a concern for them.

The cause of the rise in inflation was mainly due to energy prices (which rose but more slowly than a year ago), food and clothing prices. These are items that monetary policy finds difficult to control as they are supply side or exchange rate driven and monetary policy works on AD.

However there is a concern in these figures for the pace of recovery. The higher inflation rate means that real disposable incomes are falling faster. Wage rises are less than 3.5% and so it means that households have less real income to spend on consumption. Also as households are very aware of inflation rates (indeed they exaggerate the rise in their minds) and this rise in inflation will affect consumer confidence. As we all know consumption is around 2/3 of AD and so short-term growth can easily be reduced.

It is pretty much impossible for the Bank of England to do more. They also believe, as do most economists, that inflation will fall for the rest of the year. (RPI did fall this month.) But this change in the direction of inflation, however temporary, may have a much bigger impact than the actual small change suggests.

The Guardian covers the story here