Inflation is still far too high. The Bank of England will have to act

Remember that classic line used by the makers of Jaws 2 to promote the film? Just when you thought it was safe to go back into the water?

Annual inflation, as marked by the Consumer Prices Index (CPI), has landed at 10.1 per cent. Still in double figures when the expectation had been for it to dip below into single digits.

The week had started off so well, with Deloitte reporting a marked turnaround in the confidence of the UK’s leading finance directors. Its regular poll found real optimism among them that the worst may finally be over for rising prices.

Oh well.

Sure, the latest CPI figure of 10.1 per cent was still down (a bit) on last month’s 10.4 per cent. The Office for National Statistics also used its ever informative Twitter feed to highlight the fact that the cost of raw materials rose by 7.6 per cent, down from 12.8 per cent, and that factory gate inflation declined to 8.7 per cent from 11.9 per cent. Month-on-month inflation also eased, to 0.8 per cent.

But the phrase “clutching at straws” does rather spring to mind, because elsewhere the data is grim indeed.

An increase of 19.2 per cent was recorded for the “food and non-alcoholic drinks category”, the worst in 45 years. Some more uncomfortable facts: prices have leapt by 25 per cent over the last two years alone. That’s the same level recorded across the previous 13 years.

Needless to say, the impact of this on low income groups has been savage. While benefits were increased this month in line with September’s CPI inflation (10.2 per cent) and the national living wage (for those aged 23 and above) was hiked by 9.7 per cent to £10.42, food takes up a disproportionate chunk of the budgets of the beneficiaries.

Factor in the price of energy, a significant contributor to the inflationary surge even after the assistance with bills provided by the government, and it becomes obvious that millions of people will be left in a truly invidious position.

Globally, food prices have shown signs of easing – but this has yet to filter through to the supermarket shelves because they buy in advance. The change cannot come soon enough.

However, the performance of “core” inflation might be causing the Bank of England’s monetary policymakers even more concern.

Core inflation, which strips out volatile food and energy prices to give a picture of the underlying inflation gripping the UK economy, is proving worryingly stubborn. It came in unchanged at 6.8 per cent.

Some economists had the CPI falling to 2 per cent, maybe even lower, by the end of the year. The doves on the Bank’s Monetary Policy Committee (MPC) have based their arguments for a pause in the current cycle of interest rate rises (11 and counting) on the view that acting too aggressively now could both damage the economy and lead to the Bank undershooting its 2 per cent inflation target further down the line.

Speaking at a panel hosted by the International Monetary Fund (IMF) last week, external MPC member Silvana Tenreyro counselled patience with respect to rate rises, calling upon an analogy made by the Nobel Prize-winning economist Milton Friedman. He once likened setting economic policy to adjusting the temperature of a shower: there is inevitably a lag before you get it right.

But these latest figures, especially the behaviour of core inflation, should worry the committee. If there was any doubt about the need for another rise when the MPC meets next month, it has surely gone.

The Bank’s governor Andrew Bailey and his colleagues had successfully guided the City’s forecast of the interest rate peak down from 5.25 per cent to 4.5 per cent. That forecast is now rising again, towards 5 per cent. After these figures, that looks very much like where we are heading.

Justifiably so. Painful as further rate rises will be, UK inflation is twice what it is in the US and well ahead of that in France, Germany, Italy.

The goverment’s oft-expressed hope that inflation will halve by the end of the year will (probably) still be realised as the cost of energy eases. But we should still be more concerned about it overshooting rather than undershooting City forecasts and, ultimately, that distant-looking 2 per cent target.