20th November 2024
"Was it awkward or just to be expected? Or even both? UK CPI inflation rose to 2.3% on the previous year for October, up from 1.7% in September. The official reason not to worry is that this merely reflected last month’s 10% rise in the energy price cap. Bank of England Governor, Andrew Bailey, attempted to smooth things over by talking about a “gradual approach” to the easing of monetary policy, presumably to allow time and space to absorb all these ‘one-offs’ that are getting in the way of the neat narrative of linearly falling inflation and therefore in time, looser monetary policy too. The next one-off will be the hike to employer national insurance unveiled in the recent Budget. But we seem to be facing a third one too, in the form of the fall in sterling against the dollar in the aftermath of the decisive US election. Weaker cable naturally increases the price of the UK’s dollar-denominated imports including oil, effectively importing inflation via having to stump up more pounds than before for a given good or service.
"The challenge for the BoE now will be to support the economy while at the same time controlling this never-quite-dead inflation. Technically, the BoE’s mandate is primarily price stability, unlike the US Federal Reserve’s dual mandate of maximum employment and price stability. However, the BoE can’t just myopically chase down inflation to the exclusion of all else since it also has a commitment to support government economic policy including its growth and employment objectives.
"In a sense, the BoE’s dilemma reflects a similar tension at the heart of the new government’s policy, namely supporting growth while trying to achieve a contradictory aim at the same time. For the government, this is improving public services. For the BoE, it is controlling inflation. Either way, the public pressure is surely on to focus on the economy part since the latest Bloomberg survey suggests economic growth of just 1% for the UK in 2024, while UK consumer confidence as measured by the GFK UK Consumer Confidence Indicator has been falling since the end of the summer. Better hope for no more one-offs, then."