Comment: Clarke was right about rates after all
"The customer's demand is for more and more for less and less. The losers can only be shareholders"
Friday 18 August 1995
Sometimes you can be right for the wrong reasons. Kenneth Clarke's decision in early May to keep interest rates on hold was almost certainly a response to the disastrous local election results the day before. But galling though it may be for Eddie George, it has turned out to be the right decision.
The latest inflation and retail sales figures show that the consumer is in no mood to accept higher prices. Only big discounts by retailers have led to higher sales. As long as consumers walk away from retailers' attempts to push up prices, inflation will remain under control.
This is not to say that retail price inflation may not edge up in the months ahead. Given the rises in factory gate inflation that occurred in July, it would be surprising if there were not some further increase in both the headline and the underlying rates.
But beyond this bulge in inflation, it is difficult to see where a sustained inflationary push may now come from. The Bank of England is quite properly concerned about a renewed wage price spiral. But underlying earnings are now running at the same rate as retail price inflation, an extraordinary state of affairs three years into a recovery.
On the balance of economic evidence available at the beginning of May, the Governor was justified in his demand for higher rates. On the balance of economic evidence now available, he should drop it.
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