Mervyn King, Governor of the Bank of England, is due to stand down from his post in June of next year. During his tenure, interest rates have hit and remained at historic lows and a brave asset purchase program remains on-going. All of these efforts have been undertaken in order to try and bring the UK's economy back from the brink.
Long forgotten in all this is the Bank of England's mandate; to protect price stability in the UK via monetary policy. They have had to ignore inflation in the short term for the greater good.
External price pressures from energy markets will have undoubtedly had an effect on inflation, but the weakness of the pound throughout the past four years has cancelled out the deflationary implications of a natural fall in consumer demand through a recession.
Comments from King last week suggest that it is still deflation that haunts his thoughts, as the crisis drags onwards, hence the market's belief that yet another injection of £50bn worth of asset purchases will be announced by the Bank of England at its November meeting.
The UK inflationary picture would have been back in the headlines this week either way, even without Tuesday's CPI release and the announcement of further price increases from the utilities sector. This time last year British Gas raised its prices by an average of 18%, while hiking electricity prices by roughly 16%. They blamed a 30% increase in the price of wholesale gas from the previous winter.
Other utilities companies had already gone ahead with price hikes of their own, the rest followed British Gas's lead. It all meant that CPI reading for last September equalled a 19 year high of 5.2%.
Those price increases have now fallen out of the "year-on-year" calculations and therefore we can largely expect a sharp downtick in this month's reading. This will not last long, however, given the actions of the same utility companies last Thursday, coupled with increasing fears over food prices following what has been a very wet summer.
The UK's Department for Environment, Food and Rural Affairs estimates that wheat production has slipped by around 13%, with falls also being recorded in both barley and rapeseed crops. Similar problems were felt in corn production in the US, following a crippling drought in the rural Midwest.
Increasing prices in niche areas of the economy are one thing, but food price inflation and the consequent threat to food security is an entirely more solemn turn of events.
The Arab Spring began as a result of a Tunisian fruit seller setting himself on fire in protest at the cost of food. Therefore, it is not that wide of the mark to suggest that similar protests could be seen elsewhere should the inflationary trend continue across the West.
So, while this near-term fall in inflation should be welcomed, it will mark the bottom and we should be aware that a bounce-back is not far behind. There will be serious consequences for everyone if inflation is not controlled quickly. A fact that I'm sure will not be lost on Mervyn King, as he charts his way through the final phase of his time in the hot seat.
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