Inflation hits 10-year high making Christmas rates rise likely

·3-min read
 (West End Final fit)
(West End Final fit)

In his book The Great Stagnation, the American economist Tyler Cowen provided the best explanation for the global financial crisis I’ve come across: “We thought we were richer than we were.”

That seemingly glib remark reveals why banks, businesses, governments and households borrowed and spent as they did... until the walls came crumbling down.

So what accounts for our current economic ailment, that of rising inflation? If you pay an energy bill, tried to purchase a second-hand car or simply ate in a restaurant recently, you didn’t need the Office for National Statistics’ latest data dump this morning to tell you that prices are rising.

Inflation jumped to 4.2 per cent (year on year) last month, more than twice the Bank of England’s target of 2 per cent. And fully half of that jump relates to Ofgem’s October increase to the energy price cap (something to look forward to again in April).

So will the Bank of England raise interest rates? While the Monetary Policy Committee voted 7-2 to maintain rates at the record-low of 0.1 per cent earlier this month, that masks much of the mood music coming out of Threadneedle Street. Governor Andrew Bailey subsequently admitted it was a “very close call“.

British economist Gerard Lyons sums up the challenge facing policymakers nicely. It’s all about the three Ps: Will inflation pass-through, persist or be permanent? While it may not prove permanent, today’s figures are another piece of the puzzle that suggests it isn’t passing through in a hurry.

What might seal the deal for a December rise is the recent end of the Coronavirus Job Retention Scheme, after which the number of people in work actually rose. By the way, shout out to the furlough scheme – perhaps one of the single most successful government interventions ever.

One keen observer of the activities of the Bank will of course be the Chancellor. Given record levels of borrowing necessitated by the Covid-19 pandemic, the UK is highly exposed to even a small rise in interest rates.

Indeed earlier this year, the Office for Budget Responsibility pointed out that if rates were one percentage point higher than those used in its forecast — a level it concedes would “still be very low by historical standards” — it would increase debt interest spending by £20.8 billion.

Finally, if you want to read an actual expert’s views on inflation, City Editor Oscar Williams-Grut writes that while hiking interest rates might not put a stop to soaring inflation, it could at least slow it down.

Elsewhere in the paper, Amazon is to stop taking payments from Visa credit cards in the UK from January. Yes, there is a Brexit angle.

In the comment pages, Ayesha Hazarika writes of how she was first called the P-word at the age of four, and that Azeem Rafiq’s horrific experiences are all too common.

And finally, it may be the most problematic Christmas scene ever, but I thought you might like to know there is a rare home for sale on the ‘Love Actually’ mews (on at £3.35m, natch) where that Mark guy totally betrays his best friend confesses his love for Keira Knightly.

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Read More

The Leader podcast: How the ‘painful’ inflation rise may impact family life

The Bank of England must raise rates — but don’t expect inflation to disappear

The Bank and the City are at war on inflation: why, and who is right?

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