Understanding what’s driven inflation higher
It has to be said that the experts are notoriously bad at predicting interest-rate moves, basing their forecasts, among other things, on their expectations for inflation, which are often awry.
More importantly, what underlies the recent concern is the extraordinary and prolonged period of intervention there has been by both governments and central banks worldwide.
After the global financial crisis more than a decade ago, central banks stepped in, slashing interest rates to near-record lows and employing massive monetary stimulus programmes in a bid to kickstart growth.
The measures were meant to be temporary, enabling governments to return with their own fiscal policies against the backdrop of manageable inflation and normalised interest rates.
What happened instead was Covid, forcing governments to deploy an astonishing amount of fiscal firepower, extraordinarily quickly, as they moved to help businesses survive, prevent mass unemployment and head off seismic economic shocks.
That means we now have two enormous stimulus efforts running concurrently, and the worry is that growth surges, inflation rushes higher and, inevitably, interest rates go back up.
So how do we make sense of all this? Well, we know prices are rising: UK inflation was ahead of forecasts when it jumped to 2.5% in June – way ahead of the BoE’s 2% target.
The pandemic caused a supply squeeze, which drove prices higher and led to a fall in demand. There is an argument that prices will fall once again when demand recovers.
A dramatic fall in the oil price, which can influence costs elsewhere, in March 2020 also means that the year-on-year comparison for the same period this year is against a low number. The effect of this should fall away as the months progress.