Latest inflation data should not deter the Bank from raising rates more quickly, says IEA economist


Commenting on the latest inflation data from the ONS, Julian Jessop, Economics Fellow at free market think tank the Institute of Economic Affairs, said:

“May’s consumer price data contained something for everyone. The bad news is that the headline CPI measure hit a new 40-year high of 9.1 per cent, led by the continued surge in food prices. The latest Kantar survey suggests that grocery price inflation rose further in June.

“Nonetheless, May’s inflation rate was at least at the lower end of expectations. Some had feared a much bigger increase from April’s 9.0 per cent, after a bigger jump in the US. The numbers were therefore bad, but could have been a lot worse.

“‘Core’ inflation excluding food and energy also fell back, from 6.2 per cent to 5.9 per cent. This will not be much comfort for those struggling to eat, or heat their homes. But it may reassure the Bank of England, which is worried about more persistent inflationary pressures.

“There are some good reasons to think that overall inflation will peak sooner, and at a lower level, than many expect. On the demand side, the global economy has slowed sharply. On the supply side, business surveys and commodity markets are showing the first tentative signs that pipeline pressures are easing.

“Above all, central banks are finally starting to catch up with the surge in inflation. Interest rates are returning towards more sensible levels, and monetary growth is cooling.

“Despite this, there is no room for complacency. It is already being suggested that today’s inflation data are low enough to allow the Bank of England to raise rates by just another quarter point again at the next MPC meeting in August, rather than up the pace.

“However, the current level of official interest rates – just 1.25 per cent – is still far too low. A continued drip, drip of small increases from here is unlikely to change anything. A half-point move would at least send a clearer signal that the Bank is serious about getting inflation back down again.”

ENDS

Notes to editors


Contact: media@iea.org.uk, 07763 365520


IEA spokespeople are available for interview and further comment.


Further IEA reading: Inflation: The next threat? by Dr Juan Castañeda and Professor Tim Congdon



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