Tuesday, August 16, 2011
The danger of embedding high inflation
Posted by David Smith at 04:00 PM
Category: Thoughts and responses

The trouble with high inflation is that it can become embedded, particularly when institutional factors kick in. So the July retail price inflation rate of 5% will mean higher rail fares (RPI plus 3%) in January, which in turn will push inflation higher next year.

High inflation also makes public spending harder to control. July saw a rise in consumer price inflation from 4.2% to 4.4%, June's fall proving only temporary. Core inflation measures rose by 0.2 or 0.3 percentage points. By September, inflation will be on a rising trend, and that is the month used for the following April's pension upratings.

There are reasons why inflation should fall next year, notably the January VAT rise dropping out of the annual calculation. The big risk is that firms have changed their pricing behaviour, perhaps even in response to what they think are permanently lower volumes.

If I were at the Bank of England, I'd be slightly worried about this, from the Office for National Statistics' analysis. It cites price rises for "miscellaneous goods & services where the upward pressure came from a wide variety of goods and services but by far the largest contribution came from financial services where, overall, fees rose this year but fell a year ago, particularly for arranging mortgages". More here.