Inflation’s back! But calm down. The spike is probably temporary

Inflation is the bogeyman used by a certain sort of economist to frighten their small children into behaving well. If you scoff any more of those quantitative easing sweeties he’ll be back and it’ll be you who gets eaten!

Except that the bogeyman never appeared, even when the bank took to printing money (quantitative easing is the preferred term for that).

Some of the monetarists, who’ve been wrong about everything for the last 20 years, may be indulging in a little schadenfreude now because the monster is back at the door. Well, sort of.

The latest official figures to emerge from the Office for National Statistics show that prices rose by 1.5 per cent in April, more than double the rate in March (0.7 per cent) and the highest number for more than a year.

The Consumer Price Index figure would have been higher still were it not for the temporary 5 per cent rate of VAT Rishi Sunak introduced to help the beleaguered hospitality industry.

Another nasty lurking in the official data was that prices at the factory gate leapt by 3.9 per cent, up from 2.3 per cent the previous month.

We’re watching closely, the Bank of England said. Well, duh. If the bank ever stops obsessively watching numbers like that then Houston, we’ll have a problem.

The FTSE 100 took a bath as City traders got jumpy and started to fret about interest rate rises, all the more so after US inflation skyrocketed to 4.2 per cent. But City traders are always jumpy.

Seasoned commentators, at least those not among the small subsection rubbing its hands together with glee, were rather more sanguine. Nobody really expects a spike like the one the US has witnessed.

For a start, the UK’s CPI number for the comparative month last year was recorded at the start of the pandemic when prices were, understandably, very low.

Higher fuel prices have also had an impact. The oil price has been on the rise (which the bank can’t do much about), while gas and electricity costs soared as regulators raised their price cap which they’d cut a year earlier.

There’s also clearly a reopening effect at work. The purveyors of clothes and shoes, for example, ceased the aggressive discounting they’d been indulging in to shift product (online) during lockdown.

The price of eating out in restaurants in hotels also rose, and again, that’s not in the least bit surprising. Businesses starved of revenue are naturally going to react to the reawakening of dormant demand by adding a little hot sauce to their prices where they can.

On the flip side, some sectors, for example computers and printers, and second-hand cars, saw inflation falling. Exclude energy, food, tobacco and booze, which tend to be volatile, and you have core inflation which increased by only a little, from 1.1 per cent in March to 1.3 per cent in April.

Capital Economics doesn’t expect to see the sort of sustained price rises that will force the bank’s hand over rates until 2023. While they aren’t all so optimistic, most economists agree that higher inflation will not be sustained in the long term even if it increases some more over the coming months

The bank itself expects it to top out at about 2.5 per cent, which is above target but hardly frightening.

There is a caveat: forecasting is an extraordinarily difficult business right now because the current situation is so unprecedented. See yesterday’s column.

But it’s also worth remembering that the sort of Jeremiahs who might point to what’s going on as the inflation genie jumping out of the bottle are the same sort of people who were happy to see unemployment surging past 3 million in the 1980s just so long as the lid on price rises was kept sufficiently tight.

The government has made some terrible, often avoidable, errors through the course of the pandemic. Disturbingly, it appears not to have learnt much from them. The current woolly guidance of holidaying in “amber list” countries would be an example.

However, making the protection of jobs a key economic goal was the right decision. And that should continue to be the case, even if it means inflation getting a bit frothy along the way.