James Moore: Optimism tempting as inflation picture looks rosier, but let's not get carried away

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The Independent Online

Outlook Inflation has slipped again: Hooray! Crank up the presses, let's start printing money once more. Yes, monetary policy makers were smiling yesterday thanks to the Office for National Statistics releasing figures showing that the CPI measure of inflation, for once, did what everyone expected it to by easing to 2.5 per cent in August from 2.6 per cent in July.

RPI inflation, which includes housing costs, also fell, dropping to 2.9 per cent from 3.2 per cent. Finally, it seems, there should be some relief for household budgets where the pips are well and truly squeaking following squeeze after squeeze after squeeze. Good news, that, given Christmas is on the way, at least if you believe M&S, which is already flogging advent calendars as Marc Bolland, its chief executive, tries desperately to justify the £10m Christmas present he received just for getting his feet under his desk.

If you accept what the Bank of England is saying, it's just going to get better too. Forecasters at the Old Lady of Threadneedle Street are expecting CPI to ease its way down to the Bank's 2 per cent target level in the new year, and perhaps sooner. There's not a lot of demand in the economy to push prices higher, shops are having to slash their margins to the bone just to get people through the door and while wage rises might be inching their way above price rises, the state of the labour market means upward pressure is strictly limited. People are willing to accept what they're given because they're usually happy just to be in a job.

And there's more: the year-on-year effect of last year's utility price rises is also set to fall out of the September inflation figures. This means that in the absence of any really nasty surprises, the headline rate will fall again when the next set of figures is released.

The trouble with this rosy view of the outlook for inflation is that global pressures are pushing hard in the wrong direction. Food prices are expected to rise sharply in the coming months as the impact of a bad harvest Stateside filters through into the figures.

The oil price is on the march (it has risen by nearly a third in the last four months), which increases costs for just about everyone, and the European firms which have been handed control of the UK's utilities are rumbling about hiking prices again.

Of course, there's not a lot that the Bank of England can do about any of that, and its policymakers know this. With the economy still on the critical list, any change in an upward direction to interest rates would be suicidal.

All the same, a number of economists are looking at some of the Bank's more optimistic forecasts with a rather jaundiced eye.

But if those forecasts are motivated by a excess sunny optimism, does it really matter all that much?

Given the limited room for manoeuvre that the Bank's interest-rate setting Monetary Policy Committee has, the result will be the same regardless of whether its forecasts are optimistic or pessimistic.

However, the optimist does have a better time of it so perhaps we shouldn't be too quick to find fault.