Now This Is Transitory ...
Huw Pill, incoming Chief economist at the Bank of England gave an exclusive interview with the Financial Times this week. "I would not be shocked", he said "If we were to see inflation close to 5% or above in the coming months."
"With an inflation target of 2%, this would be an uncomfortable place for a central bank to be" he added. Governor Andrew Bailey had excited markets earlier this week, suggesting the Bank would "have to act" to curb inflation.
Some analysts think the MPC will act to increase rates by perhaps 15 base points in the November meeting. The Bank had previously said, it expected inflation to hit 4% by the end of the year before easing back into the second half of next year. Pill was of the view the MPC was "finely balanced" over whether to raise interest rates or not.
The latest inflation data would not be much help. The CPI headline rate slowed to 3.1% in September from 3.2% prior month. Goods inflation increased to 3.4%, service sector inflation fell to 2.6%. Basing effects related to the "Eat Out to Help Out" campaign last year, largely explain the drop in service sector prices. Even so without the campaign effect, the headline rate would have been 3.2% to 3.3% at best, hardly a step towards hyperinflation and stagflation.
Producer Prices continued to demonstrate the pressure on manufacturing prices. Output prices increased to 6.7% in September, consistent with a 3.4% increase in consumer goods prices. Input costs increased to 11.4%. Oil, metals and minerals are driving costs higher. This week, Brent Crude closed up at $85.30 dollars a barrel, compared to $41 dollars last year.
Earlier in the year, our models had suggested inflation would peak at around 3% in August before easing back towards the end of the year. The "stickiness of oil prices" suggests this scenario is too benign. Last year Brent Crude Prices increased to $50 dollars by December. We still expect oil prices to was back to $80 dollars in the final quarter. The inflationary impact on producer prices will ease either way. We may have seen the worst of the cost price pressure. We would not expect the headline CPI rate to rise over much from here.
This week Unilever suggested Marmite prices will have to rise by 4%. Product shrink-flation suggests the Cadburys Double Decker may soon be rebranded as a "Minibus".
Pill concluded, "We do not see, given the transitory nature of what we are seeing in our base case, the need to go to a restrictive policy stance."
Inflation is always and everywhere a transitory phenomenon. In the US, the Fed is trying to convince the public, inflation may turn out to be a little stronger for a little longer than forecast. "Transitory" didn't feature at all in the September FOMC minutes ...
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