Leading article: The Bank of England is right to hold its nerve

Inflation is proving sticky, but it is premature to tighten monetary policy

Share
Related Topics

Mervyn King and Alistair Darling have become reluctant pen pals once again. New figures showing that consumer price inflation breached 3 per cent last month have prompted the Governor of the Bank of England to write another letter of explanation to the Chancellor of the Exchequer.

Mr Darling has accepted Mr King's explanation that this jump in prices is likely to prove temporary. But not everyone has. Inflation hawks have begun to stir, pointing to uncomfortably strong levels of core inflation (excluding food and energy) in the latest statistics and questioning the Bank's assumptions about the level of spare capacity in the British economy.

These are not idle concerns. If a sizeable chunk of our productive capacity from before the recession turns out to have disappeared forever in the slump, rather than being temporarily underused, we could run into the inflationary buffers much sooner than the Governor forecasts. The hawks also note out that British inflation, in contrast with prices in other developed countries, has consistently surprised policymakers with its stubbornness throughout this downturn. Prices do seem to be "stickier" here than elsewhere.

Nevertheless, the Governor is justified in arguing that the inflationary pressures that have exposed themselves in this month's figures are likely to prove temporary. The rate of inflation will probably fall back in the coming months. The two main drivers of the increase in the headline rate – the restoration of VAT to 17.5 per cent and a spike in petrol prices – are likely to be one-off factors.

Another inflationary pressure of late has been the depreciation of sterling by some 25 per cent since 2007, which has pushed up the prices of certain imports. This too will be a one-off influence on the price level, assuming, of course, there is not a sterling crisis.

Just as important, one of the main drivers of national bouts of inflation in previous decades – rising wages – is conspicuously missing at the moment. Earnings growth has been negligible in most sectors of the economy in the past year. Indeed, many workers are still accepting pay cuts as the price of keeping their jobs. There seems little likelihood of workers demanding higher wages to compensate for an increased cost of living.

The pain inflicted by rising prices, especially for those who live off savings income, should not be dismissed. And over the longer term, the Bank does need to be alive to the danger of inflation getting out of hand. Spiralling prices at a time of weak economic growth would be a disaster for Britain. And the imminence of a general election only adds to the uncertainty with respect to the impact of fiscal policy on the economy.

But, ultimately, monetary policy-makers need to make a judgement based on the balance of economic risk. And while the risk of stagflation is real, so is the risk of snuffing out a meagre recovery by tightening monetary policy too early. Indeed at the moment, the latter risk appears the more serious.

Having decided to call a halt to quantitative easing earlier this month, the Bank has tightened monetary policy sufficiently for now. Mr King and the Bank's Monetary Policy Committee should leave policy interest rates where they are, at least until the fog of economic uncertainty begins to clear a little.

React Now

Latest stories from i100
iJobs Job Widget
iJobs General

Recruitment Genius: Senior Digital Marketing Consultant

£28000 - £45000 per annum: Recruitment Genius: A Senior Digital Marketing Cons...

Recruitment Genius: Assistant Stores Keeper

£16640 - £18500 per annum: Recruitment Genius: An Assistant Stores Keeper is r...

Recruitment Genius: Claims Administrator

£16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...

Recruitment Genius: Software Developer - C# / ASP.NET / SQL

£17000 - £30000 per annum: Recruitment Genius: Developer required to join a bu...

Day In a Page

Thousands of Russian troops marched on Red Square in the annual Victory Day parade in a proud display of the nation's military might amid escalating tensions over Ukraine  

Once again, the West fails to understand Russia

Mary Dejevsky
Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

Fishing is on Nigel Farage's mind

Ukip leader casts a line to the disaffected
Who is bombing whom in the Middle East? It's amazing they don't all hit each other

Who is bombing whom in the Middle East?

Robert Fisk untangles the countries and factions
China's influence on fashion: At the top of the game both creatively and commercially

China's influence on fashion

At the top of the game both creatively and commercially
Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

The man known as GOD has a reputation for getting the job done

Lord O'Donnell's three principles of rule
Rainbow shades: It's all bright on the night

Rainbow shades

It's all bright on the night
'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power
Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

The price to be paid for challenging the rule of extremists

A revolution now 'consuming its own children'
Welcome to the world of Megagames

Welcome to the world of Megagames

300 players take part in Watch the Skies! board game in London
'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

Charlotte Gainsbourg on 'Nymphomaniac'

Starring in one of the most explicit films ever
Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

Robert Fisk in Abu Dhabi

The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

Vince Cable exclusive interview

Charging fees for employment tribunals was 'a very bad move'
Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

Iwan Rheon is returning to his Welsh roots

Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

It's time for my close-up

Meet the man who films great whites for a living
Increasing numbers of homeless people in America keep their mobile phones on the streets

Homeless people keep mobile phones

A homeless person with a smartphone is a common sight in the US. And that's creating a network where the 'hobo' community can share information - and fight stigma - like never before