Professor of Quantitative Political Economy Vera Troeger in the Economics Department comments on the news that rising prices for clothes, hotel rooms and petrol have led to the highest rate of inflation in nearly two years, official figures show. Inflation rose to 1.0% in September, up from 0.6% in August, according to the Office for National Statistics (ONS).
- CPI rose by 0.4% from August to 1% in September – biggest jump since Brexit and in 2 years à and we expect even sharper increases over the coming months due to weak pound
- Still way below the BoE inflation target of 2% but uncertainty and plunge in GBP exchange rate as well as BoE reduction in base rate and extension of quantitative easing program (Asset purchase facility and funding for lending) in August are hastening the inflation rate towards the target rate much quicker than expected before Brexit.
- There are some normal developments, e.g. commodity, oil pushed inflation up slightly – most push came from rise in clothing prices
- ONU says no direct evidence that weak pound let to pass-through but economists expect to see this soon
- Tesco-unilever dispute over who should take the costs of weak pound – unilever threatened to raise retail prices by 10%
- Pound fell by 20% vs. $ and € since Brexit vote
- The main drivers though are Brexit uncertainty that induced a decrease in the value of the pound and this pushes prices of imported goods and services as well as intermediates up. the second factor is the BoE decision to reduce the base rate to 0.25% in August and extended the QE in order to counterbalance the effect of Brexit on the British economy. There is only so much stabilisation monetary policy can induce and in the longer run people at the bottom of the income distribution are faced with lower purchasing power due to inflation or potentially losing their jobs because of Brexit induced reduction in growth – pushing down demand and supply in the medium term.
- Wages will not keep up – squeeze of real wages to be expected with surging inflation
- Economists predict that CPI could hit 3% by end of 2017, forecasts vary a bit but we expect CPI to hit BoE target of 2% around spring 2017.
- Exchange rate pass through will hit Britain soon, esp. food prices will go up. Everything we import from Eurozone is prices in euros and with weak pound prices will go up not just for imported finished products but also intermediates: 50% of parts of cars produced in Britain are imported. Oil is priced in dollars.
- Higher inflation is a double edged sword – good for borrowers because value of debt decreases, bad for savers (pensioners) because value of savings decreases esp. with low interest rates.
- RPI (determines mortgage interest rates) only rose to 2% from 1.8% in August
- Mark Carney (BoE governor) predicted higher inflation (August inflation report) and the BoE seems willing to accept higher inflation to reduce the expected output gap à investors selling long dated government bonds because of inflation fears
Alex Buxton: Media Relations Manager, University of Warwick
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