Cooling inflation gives Bank of England temporary relief
It must have come as a shock to those who make a living frightening homeowners about the imminent rise in their mortgage interest.
Headlines warning of hyperinflation and the threat of higher borrowing costs look a little silly after the inflation rate fell by more than expected in July, easing back down to the Bank of England target of 2%.
Much of the speculation after a rise in June to 2.5% asked whether the UK was heading for a long period of spiralling prices that would force a fundamental review by officials in Threadneedle Street.
Although inflation is still expected to rise further this year, the fall in July means pressure on the central bank to calm the economy with higher borrowing costs has eased somewhat for the time being.
Anyone shopping on the high street for clothes enjoyed a fall in prices. Even car drivers had a good day. While petrol prices remain high, at about £1.32 at the pumps, the cost has stabilised in recent months and even acted as a drag on the inflation rate in July.
To really experience inflation meant buying a secondhand car. Prices are up 14.5% on average from last year, adding to an already hefty increase in 2020.
Last year, car production all but ceased during the first Covid lockdown and the number of relatively new used vehicles sent to dealers forecourts declined markedly.
This year, car production slowed
again as the supply of vital computer chips dried up amid global disruption to supply chains and rising demand. With only a small supply of cars, it is a seller’s market and prices have risen accordingly.
Most City economists dismissed the fall in inflation, saying it was likely to be a blip on the way back up to 4% sometime later this year or in early 2022. They are probably right.
But as the Bank of England argued in its latest outlook for the economy, it is difficult to see how price rises are sustained once computer chip production races back to its pre-pandemic level and cars trundle off production lines at the usual pace.
In the US, the inflation debate is likely to persist after annual price growth jumped to 5.4% in June and stayed at this level in July.
Yet the same temporary pressures apply in the US as they do in the UK, it’s just that they are magnified many times. In a helpful comparison by the Office for National Statistics, we can see that US secondhand cars prices increased at the same pace as the UK last year, by about 10%, only to take off this year with a 45.2% jump in the year to June 2021.
The frenzied used car buying in the US relaxed a little in July – but only because drivers turned their attention to brand new models fresh from the factory, pushing these prices up.
The ace in the pack for those concerned about inflation can be found in the savings figures that show about £250bn stored in UK bank deposits over the last 18 months. The same phenomenon can be seen across the rest of Europe and the US.
If consumers regain their confidence and believe not only is their job safe but their house price is protected and next year’s wage rise is in the bag, they might begin to spend it before global supply chains have recovered.
When developed countries, including the UK, seem so reluctant to share their Covid-19 vaccine stockpile with the developing countries that manufacture most of the stuff they consume, global supply chains may take a while to recover.
African countries such as Zambia, an exporter of cobalt and other metals used in every type of manufactured process, are in recession largely because of coronavirus outbreaks, and struggling to meet demand.
In this way, any momentum in annual price rises we suffer next year could be partly our own fault.