Red faces at Bank of Eng­land

Pre­dic­tions about rate of Bri­tish in­fla­tion prove to be wrong

The Irish Times - Business - - FRONT PAGE - Fiona Walsh Fiona Walsh is busi­ness edi­tor of theguardian.com

There was some good news for Bank of Eng­land gov­er­nor Mark Carney yes­ter­day as the UK’s in­fla­tion rate un­ex­pect­edly stuck at its five-year peak of 3 per cent.

Had the fig­ure risen to 3.1 per cent, as most City econ­o­mists ex­pected, Carney would have been obliged to write an open let­ter to the chan­cel­lor, Philip Ham­mond, ex­plain­ing why the cost of liv­ing was so far adrift of the gov­ern­ment’s 2 per cent tar­get.

But there was bad news for the gov­er­nor too. While Carney has been spared the task of pen­ning an ex­plana­tory let­ter, he’ll have to spend more time de­fend­ing the cen­tral bank’s shaky record on fore­cast­ing – and its de­ci­sion ear­lier this month to raise in­ter­est rates for the first time in more than 10 years.

Just a fort­night ago, when it raised rates by a quar­ter of a point from their all-time low of 0.25 per cent, the bank said it ex­pected in­fla­tion to break through 3 per cent in Oc­to­ber,

pos­si­bly to 3.2 per cent. So imag­ine the City’s sur­prise yes­ter­day morn­ing when the fig­ure, as mea­sured by the Con­sumer Prices In­dex, turned out to be the same again as Septem­ber’s 3 per cent.

“Red faces all round as UK in­fla­tion fails to rise as widely ex­pected – not least by the Bank of Eng­land,” was how IHS Markit’s chief econ­o­mist Chris Wil­liamson put it.

Cost of liv­ing

For con­sumers, the in­fla­tion data also con­tains both good and bad news. The good news is that the Brexit-in­spired surge in the cost of liv­ing since last year’s ref­er­en­dum – on the back of the fall in the value of the pound – may just have reached its peak. And the im­me­di­ate post-ref­er­en­dum cur­rency ef­fect will start to work its way out of the in­fla­tion cal­cu­la­tions by the end of the year.

Falls in the price of fuel and fur­ni­ture helped to limit the over­all in­crease in in­fla­tion last month. But the bad news for shop­pers is that food prices are ris­ing at their fastest rate for

more than four years – by 4.1 per cent over the past year – tak­ing them to their high­est level since Septem­ber 2013.

The in­creases were par­tic­u­larly marked in fruit and veg­eta­bles, in fish, meat and dairy, rais­ing the prospect of far more ex­pen­sive fes­tive fare this Christ­mas, leav­ing even less for shop­pers to spend on non-es­sen­tial gifts and treats.

As Stephen Clarke of the Res­o­lu­tion Foun­da­tion pointed out, this hurts poorer house­holds hard­est, as they spend a far larger pro­por­tion of their in­comes on es­sen­tial items such as food.

Unions re­newed their de­mands for some­thing to be done to help the mil­lions of house­holds strug­gling to sur­vive the squeeze. With Ham­mond due to de­liver his bud­get next week, the TUC’s Frances O’Grady urged the gov­ern­ment to “stop turn­ing a blind eye to Bri­tain’s cost of liv­ing cri­sis.

“House­hold bud­gets are be­ing stretched to break­ing point”, she said.

In­fla­tion wasn’t the only sur­prise in the City yes­ter­day, with re­tail an­a­lysts also caught on the hop by the com­pe­ti­tion reg­u­la­tor’s de­ci­sion to grant pro­vi­sional clear­ance to Tesco in its £3.7 bil­lion (€4.13 bil­lion) bid for cash-and-carry group Booker.

Tesco’s bid for Booker has been con­tro­ver­sial from the start. Even be­fore it was launched in Jan­uary, it saw the res­ig­na­tion of Tesco’s se­nior non-ex­ec­u­tive di­rec­tor Richard Cousins, who was op­posed to the deal.

Some Tesco share­hold­ers have also voiced their con­cern at the price be­ing paid.

The multi­bil­lion pound Booker move has raised fears among re­tail ex­perts that it might dis­tract the man­age­ment team at Bri­tain’s big­gest re­tailer from their pri­mary task of re­vi­tal­is­ing the core UK su­per­mar­kets op­er­a­tion.

Gro­cery mar­ket

Tesco’s sheer size – it still has just un­der 30 per cent of the UK gro­cery mar­ket – had led most sec­tor ex­perts to ex­pect some con­di­tions would be im­posed be­fore the deal would be al­lowed to pro­ceed.

The most likely op­tions were for Tesco to be or­dered to sell off its 1,000-strong Tesco Ex­press net­work or its One Stop con­ve­nience stores chain.

In the end, the com­pe­ti­tion and mar­kets au­thor­ity has made no such de­mands, in­stead say­ing it be­lieves that com­pe­ti­tion is strong enough in both the whole­sale and re­tail gro­cery sec­tors to pro­tect cus­tomers from higher prices or re­duced ser­vice.

Ri­val whole­salers and in­de­pen­dent store op­er­a­tors have warned the deal could force them out of busi­ness.

PHO­TO­GRAPH: MANDO BABANI/EPA

Bank of Eng­land gov­er­nor Mark Carney: bank has shaky record on fore­cast­ing.

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