The news that inflation has jumped to a four-year high should come as no surprise to anyone. The most powerful drivers of this surge in the rate of price rises are fuel and food prices, and behind much of that is the effect of the devalued pound post-Brexit. The bad news is that that is not the end of the bad news.
Not only is inflation up, but it is up more than the economists expected it to be. It either means that the push-through form the weaker pound is arriving more rapidly than thought possible or that retailers are finding it more difficult to absorb rising import costs, or a combination of the two. Should inflation push towards 4 per cent, say as a result of a further decline in the value of the pound as the Brexit negotiations drag on, then inflation will surge still higher. In that case the Bank of England may feel impelled to raise interest rates to dampen the pressure.
They have not done so during previous episodes such as this, and are inclined to “see through” currency movements. Much depends on the movement in wages. If the bank detects signs that they are starting to push upwards then they will act to defuse a potential inflationary spiral before it is too late.
So far, salary growth remains relatively subdued, though it has picked up since the economic downturn. The good news is this lessens the chances of higher borrowing rates for homebuyers, businesses and consumers. The bad news is more immediately apparent: that prices are rising as fast as, or faster than, pay, and thus living standards are undergoing yet another squeeze. Real wages are stagnating for longer than at any time in modern British history. What marginal amelioration the Chancellor offered for some hard-pressed families last week will be precisely that.
Only pensioners, with their well-known “triple lock”, can feel truly insulated from the pinch. Their benefits will rise more quickly than either real wages or their minimum entitlement of a 2.5 per cent annual increase. Some regard this as another example of intergenerational unfairness, but the recent reduction in pensioner poverty comes after three decades of constant real terms cuts in the value of the state pension.
For now, as a Conservative manifesto commitment, the triple lock may be judged safe.
Wage restraint, voluntary or not, will in fact be the way the UK deals with the burden of Brexit over the next decade or so. Whatever happens, we know that the Brexit deal will offer less access to European markets than enjoyed today. It means higher costs for British industry and perhaps new tariffs to overcome. When wages are 70 per cent of the cost of production in the UK economy, they will have to adjust downwards in order to protect jobs and investment. The squeeze will go on.
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