Inflation’s looking frothy again but the Bank of England can afford to relax

Fans of the Fast Show may remember a Channel Nine sketch featuring what looks like a terribly sincere and boring mock interview (albeit played for laughs) with a sober-suited economics minister.

That is until he mentions the word “inflation”, at which point all hell breaks loose. A horn is blown, the set collapses, coloured lights appear, things go bang, and the minister has a crown put on his head and a pie put in his face.

Similar such excitement must have been created in the offices of certain baby boomer economists and economic commentators as the Office for National Statistics released figures showing UK prices rising at a 2.1 per cent clip.

Look, look – it’s back. Inflation? Inflation! INFLAY-TION!

Quick, quick, find somewhere to hide. The monster is back under the bed. The next thing you know we’ll be up at 5 per cent with the Americans. We’re doomed, DOOMED! And we told you so!

These are, of course, the monetarists who’ve been pulling air in through their teeth, shaking their heads and playing the role of Jeremiah every time the Bank of England has engaged in the fancypants version of printing money that it likes to call quantitative easing, in an attempt to boost the economy. They sometimes extend that to when Rishi Sunak pulls fiscal levers and borrows to power spending.

These people cut their teeth when inflation was a lot more frothy and it was felt that it was worth unemployment surging past 3 million to keep it under control. It wasn’t, by the way. Not even close, as those of us who were at the sharp end when that happened can testify.

Still, they’ve been wrong about everything for the past 20 years, so I suppose we can forgive them for trying to have a little fun at a time when there’s still a terrible dearth of that.

A few party poppers and the odd bang in the office – if it’s open, and more than a quarter full – might at least brighten the place up at a time when the returners are starting to realise precisely why people have so readily taken to working from home.

In the real world, price increases had been expected to have risen 1.8 per cent for the year to May compared to the 1.6 per cent recorded in the year to April. The actual 2.1 per cent, which is just above the Bank’s 2 per cent target, is quite a bit higher than that. However, economic forecasts of any kind have to be taken with less of a pinch and more a plateful of salt right now. We are, after all, in what amounts to uncharted economic territory.

The 0.5 per cent increase is still quite a jump, but it looks a lot less surprising when you break it down. The biggest contributor, for example, was rising fuel prices, powered by rising global oil prices, which the Bank’s Monetary Policy Committee (MPC) can do precisely nothing about.

After that you have the recreation and culture and the clothing and footwear categories. Shut down for months on end and experiencing strong demand as a result of reopening, it’s no surprise to see that the former’s constituents have been pushing through price rises. With the wolf prowling around the door, they’ve had to. Ditto the retailers selling clothing and footwear, some of which had to discount heavily to tempt their mostly online customers in the preceding months.

We will inevitably see a lot of debate about whether and when the MPC should raise interest rates from the current record low level of 0.1 per cent. This will likely make Mr Sunak, who has borrowed a lot of money and continues to do so, quite uncomfortable. The UK is a lot more sensitive to rising interest rates than it was prior to the pandemic.

However, while the Bank’s governor, Andrew Bailey, has stated that the MPC will act if it feels the need, there is no need to do so just yet. We are a long, long way from where the US is at, and the same pressures don’t apply.

It’s not as if the MPC’s members can afford to spend their next two-day meeting watching the Fast Show. But they can afford to maintain a watching brief.