Inflation hits 9.4 per cent with all eyes now on Bank of England

It’s not stopping. The latest CPI inflation figure rolled in at 9.4 per cent in the year to June, another rise (from the previous 9.1 per cent), another “worse than expected”, another “highest in 40 years”.

We will still be on that 40-year comparison when price rises inevitably reach double figures later this year. Inflation peaked at just over 12 per cent early in 1982. Most forecasters think this year’s peak rate will be in the region of 11-and-a-half per cent. But that’s slim comfort. And they’ve been wrong before.

Against this backdrop, the previous night’s intervention by the Bank of England’s governor, Andrew Bailey, shouldn’t have come as any surprise. What he had to say was similar to what other members of the rate-setting Monetary Policy Committee have been saying in their speeches: we take this jolly seriously and we’ll do what it takes.

But Bailey’s speech merits greater attention because he’s the governor and he has a new chancellor to deal with, even though Nadhim Zahawi might not stay in the role for long. His party is preparing to give its verdict on the dismal leadership contest he was booted from at an early stage and the winner will have their own ideas on whom they want as their next door neighbour in Downing Street.

Bailey’s insistence that the MPC remains committed to its 2 per cent target, and that it is achievable “no ifs, no buts”, was partly political, a message to the Bank’s critics. So was his (correctly) hailing the BoE’s independence, and the current system under which UK rates are set. Some of the dimmer lights in the Tory Party have taken to questioning this of late. Taking shots at Threadneedle Street is a handy way to distract attention from their own party’s failings.

It was, however, also partly aimed at another group that thinks higher inflation is becoming entrenched in wage settlements and corporate pricing and is therefore here to stay whatever the BoE does. This group includes some at the BoE.

Getting inflation down to the target level, Bailey said, is “our job, and that’s what we will do”. He was speaking to all of them there. The fact that he also raised the question of a 0.5 per cent rise, which three members of the MPC have repeatedly voted for, was also highly significant.

We’ll return to that after considering the latest data, which offered plenty of meat for the MPC’s critics and sceptics. Just six out of the 277 categories considered by the Office for National Statistics showed falls in prices. Less than a third showed price increases of less than 4 per cent, which, remember, is still double the BoE target.

Then there are the factory gate prices, which leapt by 16.5 per cent in the year to June, up from 15.8 per cent in May, horrible numbers that clearly help to make the case for a more aggressive approach even if that would damage an economy that currently looks as weak as a newborn kitten.

Boris Johnson used what will mercifully be his final Prime Minister’s Questions to bang about the post-pandemic recovery, as he often has done, ignoring the fact that it has evaporated like milk spilled outside while the UK was in midst of the hellfire of its record-breaking temperatures. Plus ca change.

That weakness puts the BoE in a terrible bind. A rise of 0.5 per cent will squeeze the economy further.

Despite all this, commentators scratching around for optimism did manage to find some. They noted that “core” inflation, excluding volatile food (up an ugly 9.8 per cent) and fuel prices, appears to be slowing a bit. True, it’s rather like a football fan cheering the new kid in the midfield formation for creating a few nice chances in the midst of a 4-0 defeat, but it’s better than nothing.

Bailey said that a member of the public recently sent him an email in which she said that she appreciated what he was doing, but could he “please, please, please be more cheerful”.

“I should say that I do seek earnestly to avoid the role of Private Frazer in Dad’s Army – we are not doomed, far from it. But we are in difficult times.”

He was also at pains to stress that a 0.5 per cent rate rise is not locked in. The decision, he was at pains to stress, is for the committee to make when it next meets.

But here’s the thing: we’ve seen a series of speeches by MPC members along similar lines to Bailey’s. Other central banks have already acted with more assertiveness, notably the US Federal Reserve, causing the pound to weaken against the dollar, further stoking inflation.

It is easier for the Fed; the US economy is notably stronger than Britain’s. But UK inflation is now notably higher than the US, or indeed any other member of the G7. It is causing considerable suffering to those whose incomes are insufficient to cope. Wage rises for most people are undershooting price rises, often by a significant degree.

Another problem for the MPC is Britain’s political instability and the staggering ineptitude of its governing party. That could yet exacerbate the difficult times Bailey referenced.

All the same, the Dad’s Army analogy was a risky one for the governor to use. They won’t be comparing him to Private Frazer if he fails to keep the promises he made in his speech, or if the MPC shies away from the tough action its members keep talking about. He may instead find himself cast in the role of the hapless Captain Mainwaring.