Inflation jump supports BoE hawks’ claims

Written by Oliver Wade
16/07/2018

Economists have predicted that data this week will reveal a rise in inflation from June, in a development that would boost the hawks on the Bank of England (BoE) ahead of a crucial decision on interest rates in August.

Consumer price index (CPI) inflation is expected to rise from 2.4 per cent in April and May to 2.6 per cent in June, according to the consensus forecasts. The Office for National Statistics (ONS) will publish the latest figures on Wednesday, providing the BoE with one of the last major pieces of economic data ahead of its 2 August 2018 Monetary Policy Committee (MPC) meeting.

An increase in inflation would support the case put forward by multiple BoE economists for an interest rate hike in due course. Governor Mark Carney and chief economist Andy Haldane and other members of the MPC have all hinted that they may vote to raise interest rates.

The BoE hawks have argued that wage pressures from a tight labour market justifies withdrawing stimulus, but the view that the domestic inflationary pressure increasing is highly contentious among economists, with oil price hikes affecting fuel prices.

A decision to increase rates would take place against a backdrop of relatively weak economic growth, as well as the potential for disruption from the Brexit process and the looming possibility of a global trade war.

Analysis due to be published today from EY Item Club will predict GDP growth for the current year of only 1.4 per cent. This is the weakest level of growth the UK has experienced since 2012 thanks to higher levels of inflation, lower consumer spending and a moderation in growth in the Eurozone economy.

EY chief economist Mark Gregory said: “Business should be prepared for a low-growth economy over the next three years. Regardless of the outcome of the Brexit negotiations, the resulting adjustment is likely to act as a drag on the economy.”

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