It is the Bank of England’s job to hit the government’s 2% inflation target, so from the perspective of Threadneedle Street policymakers there are a number of worrying aspects to the latest cost of living figures.
Let’s start with the obvious: the annual inflation rate rose from 6.2% to 7% last month and is now at its highest level since early 1992: that’s a long way north of the official target.
Then there’s the speed at which price pressures have surfaced. A year ago, the annual inflation rate was only 0.7%: the increase in magnitude in the 12 months since is unprecedented.
The pickup in inflation is also broad-based. Clearly, Russia’s invasion of Ukraine has given an added twist to the problem by jacking up energy costs but there is more to it than that. Food, eating out, clothing and furniture have all become more expensive.
What’s more, there is worse to come. When the April inflation figures are released next month they will include the 54% increase in the energy price cap – which alone will add about 1.8 percentage points to the annual inflation rate.
Even allowing for the 5p-a-litre reduction in fuel duty announced by the chancellor, Rishi Sunak, in his spring statement, the annual inflation rate in April is going to climb well above 8% and – given that in every recent month the figure has surprised on the upside – could well be about 9%.
Finally, high inflation is going to stick around for a while. While in the summer there should be some reduction in the annual rate, there is likely to be another rise in the autumn when the energy price cap is again adjusted. Inflation will remain at 7% or above for the rest of 2022.
The strength and persistence of inflation creates economic and political problems for the government. Stagflation – a toxic combination of stagnant output and rising inflation – is a racing certainty but there is also a risk of an intensifying squeeze on living standards caused by prices rising faster than wages, driving the economy into recession.
Sunak will face demands to do more to help mitigate the impact of price rises. A combination of falling real incomes plus Partygate spells real trouble for Boris Johnson’s administration, and raises further questions about why the chancellor failed to act more decisively on the cost of living crisis in last month’s mini-budget.
One reason why the onus is on Sunak is that voters can expect little assistance from the Bank. The next meeting of its monetary policy committee in early May will coincide with the 25th anniversary of Gordon Brown’s decision to grant Threadneedle Street operational independence. Despite the obvious risks of harming an already weakening economy, the Bank is expected to mark the occasion by raising interest rates for a fourth meeting in row.