The surprise drop in inflation this month to below the Bank of England’s 2 per cent target has prompted inevitable calls for further cuts to base rate. But, says Darren Cook, of INTEREST magazine, there are still plenty of inflationary pressures in the system which means the MPC should take a cautious approach, not least the potentially inflationary risks in the upcoming Autumn Budget.
“September’s CPI reading was driven by a sharp fall in energy prices which will prove temporary as we move into winter, especially with concerns over escalating tensions in the Middle East,” he says. “Services inflation is also proving sticky, and we’re yet to see the last of public sector pay disputes, which history shows have the potential to spark a wage spiral if managed carelessly.”
That’s a history lesson explored in the new edition of INTEREST, and one the new Chancellor Rachel Reeves will be keenly aware of as she heads to the despatch box next week to deliver a Budget that simultaneously plugs the nation’s fiscal black hole and sparks growth. “The Chancellor’s position isn’t an enviable one,” says Cook. “If Ms Reeves gets her sums wrong, we could see a ‘Truss 2.0’ style response that sees both Government bonds and the pound come under pressure once again.” (Pages 8 & 9)
That matters because, as we explore in the latest issue of INTEREST, a weakened pound is often overlooked as a source of inflation, says Cook. “The UK is a big importer, and a weak pound means imported goods and energy cost more. That’s why inflation proved stickier in the UK in elsewhere, why the pound performs so badly in times of crisis and why the Bank of England should be thinking much more about protecting the value of sterling by keeping base rates higher than economic rivals.”
