The UK government has had plenty of economic problems to worry about over the past year but rising inflation has not been one of them. Repeated lockdowns and the shift to online shopping have helped keep price rises in check.
That period is now coming to an end. By the standards of the past – the mid-1970s, say – inflation is going to remain low this year. Unless things go badly awry, it should not become a real headache for the Bank of England. But it will start to influence policy.
Even after the small rise to 0.7% in January, annual inflation as measured by the consumer prices index remained well below the government’s 2% target. At least, that is the best estimate the Office for National Statistics can provide in the circumstances. The ONS has tried to adjust for the change in spending patterns (far fewer flights) and has imputed prices for sectors that are closed (restaurants). The picture, broadly, was that clothing and footwear prices went down, while the cost of food, furniture and household goods went up.
Bigger moves can be expected in the coming months, so that by April inflation is likely to be about 2%. First, there will be no repeat of last year’s collapse in oil prices. Motorists are already seeing the difference at the pumps from the recent jump in the cost of crude.
Second, Ofgem has raised its utility price cap by 9.2% and energy companies are raising prices for domestic customers. Third, unless Rishi Sunak decides otherwise in the budget, the temporary cut in VAT for sectors such as hospitality will end.
It would come as no surprise to see inflation rise further over the summer. Many consumers are cash-rich after being deprived of spending opportunities, and a lot of businesses are clinging on by their fingertips. The combination of the two is likely to push up prices. Brexit will continue to have a temporary upward effect on inflation.
Rising prices would only prompt a marked change in policy from the Bank of England if there were signs that it was leading to a surge in wage inflation. That doesn’t seem all that probable, given the sharp rise in unemployment over the past year. But the Bank will start to think about how and when to unwind some of the emergency stimulus it has been providing. Negative interest rates will be off the agenda.