James Moore: Panicking over possible rate rise is not helpful

 

Outlook Shock horror: inflation is up to 1.9 per cent. That’s just 0.1 per cent below the Bank of England’s 2 per cent target. Look out, interest rates will be at 10 per cent before you know it!

The problem with the economics news cycle is that it is based on relatively small numbers, and on economists’ forecasts of where those numbers will be when the official data is released. Even a slight deviation from the forecasts is automatically a big deal, worthy of a flurry of excitable comment and (at the end of the day) grave-looking experts warning of dire consequences for the economy when Newsnight can’t find anything else to report on.

It’s true that the increase to 1.9 per cent was quite a surprise. It caught a lot of people on the hop. But there would still have been a kerfuffle had it jumped to  1.8 per cent. Even 1.7 per cent would have been deemed worthy of note given that the consensus was for 1.6 per cent.

And there may be a rather simple explanation for the apparent “surge” in inflation. As the Office for National Statistics pointed out, it was driven by a number of short-term factors that City scribblers failed to factor into their projections. To take one example, clothes retailers haven’t indulged in the sort of discounting we saw last year because the weather was really quite warm last month. People responded by buying more summerwear, so there was less incentive for shops to cut prices. Where they did, as the summer sales got under way, discounts were less pronounced.

This didn’t stop the market from reacting, but that’s what markets do. Sterling rose, bond prices fell, as the herd mentality took over and traders all over the City placed bets on UK interest rates rising.

Which is what they will do. It’s just that the Bank of England’s Monetary Policy Committee is unlikely to take too much notice of one potentially aberrant set of figures. It will change tack only if the next two or three months’ figures suggest there was more to this latest set of numbers than a late rush for shorts, halter tops and swimwear. That said, with the economic recovery now established and house prices continuing to cause concern, acting to cool things down soon, and gradually allowing more normal monetary conditions to take hold, would be no bad thing.

Better that interest rates rise sooner, and more gently over a longer period, than increase sharply as a result of a panic if today’s economic data does signal something nasty.

Comments