Bank may have to act on interest rates as inflation kicks the poorest hardest

I doubt Catherine Mann would kick off a meeting of the Bank of England’s Monetary Policy Committee (MPC) with: “See, told you.”

But with inflation jumping back up to 10.4 per cent in February, she might feel like doing so.

It will be interesting to read the minutes of the latest meeting to see if there is any hint of that in coded language, but that’s being flippant when this is no laughing matter.

We were supposed to be done with double-digit price rises, which Britain has been mired in since August. It was hoped that inflation would continue its painfully slow decline, with a Reuters poll putting the Consumer Prices Index number for February at 9.9 per cent, down from 10.1 per cent in January. That hope was comprehensively dashed.

Mann, an external MPC member and its leading interest rate hawk, has repeatedly called for tougher action. Looks like she was right.

Let’s dive into the numbers, which aren’t pretty. Month-on-month prices were up by 1.1 per cent, nearly twice what analysts had predicted. The largest upward contribution to the annualised figure came from the price of food in restaurants and booze in pubs, which had seen discounting in January.

Of still more concern will be the price of food and non-alcoholic drinks, which rose by 18.2 per cent. Only baby boomers will really remember the last time Britain experienced food price inflation at this sort of level. We haven’t seen the like of it in 45 years.

Remember when warnings of higher food prices were dismissed as part of “project fear” in the run-up to the Brexit vote? How’s that looking now the humble salad is a luxury item and veggies are too pricey for some to put on the plate?

Food takes up a disproportionate amount of the budgets of those on low incomes. Neither the government’s national living wage nor benefits have been rising quickly enough to cope with the sort of price rises consumers are experiencing. It’s a kick in the teeth.

The New Economics Foundation served up a handy analysis illustrating how price rises on essentials will outstrip rising incomes three times faster for the poorest families when compared with those on middle incomes. It is only the richest households who continue to see their incomes oustrippping inflation. Everyone else is underwater.

This is exactly why, in its words, “things feel so broken”.

Where I diverge from the NEF is in its urging the Bank of England not to jump into a rate rise. “We need to get the next steps right,” it tweeted – and not without justification: rate rises hit the economy, have a negative impact on jobs and borrowers have to pay more.

It should also be noted that factory gate price inflation eased a little while fear continues to stalk the financial sector, which plays a disproportionate role in the UK economy. The interest rate-driven banking crisis is far from over – although banks’ share prices have been rallying lately – and it too will have a dampening effect on said economy.

Longer-term expectations of a sharp fall in inflation, as the impact of the spike rise in energy prices washes through the system among other things, remain largely unchanged. So there is a dovish case to be made, as the NEF did, and MPC members Swati Dhingra and Silvana Tenreyro likely will. The former has voiced concerns about possible deflation in future.

On the other hand, the UK CPI headline number is far in excess of what countries such as the US and France are experiencing and more than five times the MPC’s target.

Most troublingly, core inflation – which strips out food prices and other volatile components such as energy – also rose sharply to 6.2 per cent from 5.8 per cent when a small fall (to 5.7 per cent) had been expected. The pace at which the price of services rise is quickening again.

Mann has previously voiced concerns about greedy firms forcing through price rises hoping weary consumers will take it on the chin. Some of that has clearly been happening.

City betting swung from close to fifty-fifty that the MPC would hold, to putting the chance of another rate rise at 90 per cent. That now looks about right. The MPC’s credibility is at stake here. Recent dovish comments from governor Andrew Bailey – apparently, since he is master of obfuscation – are not ageing well.

The Bank really has very little choice but to act. Another rate rise will represent hard but necessary medicine. This latest set of data makes it very clear that the inflationary beast is still roaring. The MPC must act to shut it up.