Inflation falling? No-one is fooled

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The latest inflation figures have no-one fooled. While CPI dropped back to the tidy level of 2%, most economists do not take it as a sign that inflationary pressures are over. Many have been quick to point out that there are myriad factors likely to push inflation higher for the remainder of the year.

What’s behind the drop? There are plenty of seasonal factors keeping rates low. Danni Hewson, financial analyst at AJ Bell, said: “The return of summer sales in clothing and footwear has helped keep prices down. The cost of eating and drinking out which surged on reopening last year has been subdued by comparison as has the cost of services like getting a haircut where salons aren’t having to shell out for emergency PPE.”

‘Base effects’ are also part of the reason. This time last year, shops were putting up prices as they tried to compensate for the long, dismal months they had been in lockdown.  As such, the comparison figures were more flattering. There are also some questions over how the price of package holidays has been calculated; anyone who has ‘staycationed’ this year will be grimly aware of significant price rises for holidays.

Economists are now in the unusual position of both predicting that inflation will be transitory, but also predicting that it will go significantly higher in the next few months. Why? Supply shortages are still a factor. From Nando’s running out of chicken and McDonald’s of milkshakes to the soaring cost of used car prices as semiconductor shortages bite.

There are also worries over wage inflation. Last week’s UK employment figures showed the number of job vacancies soared in July to 1,034,000 from the previous month. Hard-hit sectors such as manufacturing and hospitality report a lack of skilled workers and many businesses report having to pay higher wages to recruit staff. As such, wage inflation remains a risk, even as the furlough scheme ends in the Autumn.

Nevertheless, many had been concerned that policymakers were underestimating the potential for price rises and inflation would run out of control. This seems an increasingly unlikely scenario. The central banks’ view that inflation is transitory appears to be sound. This should allow the current accommodative monetary policy to continue, to the delight of stock markets.