Sunday, June 25, 2023
As the gloom deepens, are there any glimmers of light?
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt. Not to be reproduced without permission.

Woe, Woe and Thrice Woe, if I may start today with a cultural reference that will be lost on all but older readers. It has, once more, been one of those weeks and you will not have much difficulty in identifying my three bits of woe, even before I set them out.

I mentioned last week that it was unwise to expect good news on inflation from the Office for National Statistics (ONS) and, sure enough, on Wednesday morning the statisticians delivered the fourth nasty inflation surprise in a row. Instead of dropping to 8.5 per cent or below, as analysts expected, consumer price inflation stayed at a stubbornly high 8.7 per cent. And, worse, the “core” rate, the consumer prices index (CPI) excluding food, energy, alcohol and tobacco, rose from 6.8 to 7.1 per cent, its highest yet this sequence. It was also the highest since March 1992, before we even had an inflation target.

In another corner of the ONS, released at the same time as the inflation figures, came news that public borrowing last month was almost twice as high as a year earlier, and is so far this fiscal year overshooting the official forecast. Oh, and public sector debt has exceeded 100 per cent of gross domestic product (GDP) for the first time in more than 60 years.

The third bit of woe, 143 miles away from the ONS in Newport according to the AA’s route planner, was delivered by the Bank of England on Thursday lunchtime. Seven members of the nine-member monetary policy committee (MPC) voted for a half-point hike to 5 per cent. Official interest rates are now 50 times their level in December 2021 and the two who voted for no change were concerned about the impact of so much tightening, much of which has yet to come through.

The Bank majority was responding to those inflation figures and earlier data showing strong wage growth and has not ruled out the further hikes that markets expect. A half-point rise was bigger than most expected, at least until the release of the inflation figures.

It is all very gloomy, and my task today is to try to find some glimmers of light amid the gloom. Let me start with inflation. Are we doomed to high inflation from now on? Magicians are threatened with expulsion from the Magic Circle if they reveal how tricks are performed. I shall risk expulsion from its economics equivalent by revealing how to try to judge what will happen to inflation over the next few months.

The reason inflation did not fall last month was because the monthly rise in the CPI, 0.6 per cent, was exactly the same as in May last year. For inflation to fall in the second half of this year, monthly CPI increases must be smaller than a year earlier. That looks likely. From May to December last year, driven by higher energy costs, the CPI rose by 4.7 per cent. In the last year before the pandemic and Brexit, the rise over that period was just 0.6 per cent. If we had a repeat of 2019 in coming months, inflation would end the year below 4 per cent.

That may be optimistic but a rise of just under 2 per cent in the CPI between now and the end of the year would be enough to deliver an inflation rate of 5 per cent, which is the highest it can be, I think, for Rishi Sunak’s “halving inflation” pledge to be met. The standout month for a sharp fall in inflation is October. Last year, thanks to higher energy bills, the CPI rose by 2 per cent in that month alone.

I am not saying a significant fall in inflation by the end of the year will mean the problem has been cracked, but any port in a storm. Another is provided by the latest producer price figures, sometimes called pipeline inflation. A year ago, manufacturers’ raw material and fuel cost were rising by more than 24 per cent. Last month that rate came right down to 0.5 per cent. Output price inflation, “factory gate inflation”, was running at nearly 20 per cent last summer. Now it is 2.9 per cent.

I am not going to overegg this. These figures cover manufacturing and the inflation impetus is shifting from goods to services, with service sector inflation at its highest since the early 1990s, but it is a glimmer, and a sign that inflation can fall.

As for the public finances, I don’t think I have ever seen quite as many caveats from the ONS as with its announcement that public sector net debt was more than 100 per cent of GDP, its highest since March 1961. You can tell how long ago that was because Spurs were just closing in on the league and cup double. But the estimate, the ONS said, was “highly provisional and likely to be revised”.

Leaving that aside, the increase in debt was driven by the fact that public net borrowing last month, £20 billion, was the second highest May figure on record. It is no use pretending that the public finances are healthy, but the glimmer here was that borrowing was swelled by government support with energy bills, which is about to come to an end. One of the factors pushing up borrowing will thus cease to do so, though others, including a rising debt interest bills, will remain.

Can I find a glimmer in the third “woe”, the Bank’s latest hike in interest rates? It being the Bank, not much. But, while it may be clutching at straws, there are a couple of things. By raising rates by a half-point now, the MPC may have headed off the need for another hike in August, which a quarter-point would have left the markets’ expecting, though that will depend on the data. The Bank also says that the new rate is “likely to reduce inflation below target in the medium term”. People will take limited comfort from that, given the forecasting record, but it is better than nothing.

There is one more thing. GfK’s consumer confidence index showed a rise of three points this month, it was revealed on Friday, continuing its recovery from the all-time lows of last winter. It may be that people do not know what is about to hit them, but for the moment that is a positive sign.

There is only so much I can do. The pandemic, the inflation shock and Brexit mean we are now a weakly-growing, inflation-prone economy. That in itself is quite a gloomy diagnosis. With talk of recession ramping up, something I shall look at again soon, we have to hope things do not get worse before they get better.