Business
Investors hate many things. Uncertainty, volatility and, strangely, declaring victory.
Take hot inflation. The war on fast-rising prices has been won, we beat it. There should have been a parade, with central bank interns twerking in the street as confetti rained... Yet few celebrated and even fewer accept the victory.
Economists, politicos and pundits wrong-headedly sweat “sticky” services prices and rising wages, especially after January’s consumer prices index (CPI) pick-up saw inflation return to 3pc. Consumers lament sky-high food prices that refuse to fall and everyone regards April’s minimum wage and employer National Insurance contribution rise as a ticking timebomb.
Yes, inflation has hammered households since 2021. Horrid, full stop. Prices at the end of January were an eye-watering 24.8pc above those recorded in December 2019. (Don’t forget CPI understates many people’s experience). Wretched indeed.
A military war ending doesn’t mean the destruction the war caused is somehow reversed, it only means no new destruction. Ditto with inflation.
Prices and inflation are different. Inflation is the speed of changing prices, now 3pc year-on-year, based on CPI. But while the rate of inflation can fall, prices tend not to. Select categories may, but falling prices – deflation – well, developed nations don’t do that. Why?
Significant deflation means depression, which is a far deadlier war. Reversing CPI’s post-pandemic rise means approximating 1929-33’s deflation or the early 1920s’ post-First World War downturn.
Do you really want that? Didn’t think so.
Winning the inflation war was never about dropping prices, just slowing the rise.
Like its global peers, the Bank of England (BoE) actively wants 2pc annual inflation as it helps reduce the real value of existing debt repayment a lot – about £56bn per year, or half the size of the annual deficit. Whitehall wins; you lose.
Yet any time the rate tops 3pc, Andrew Bailey must write to Rachel Reeves explaining it. According to BoE forecasts, the governor will have to whip out his pen later in 2025, with inflation set to peak at 3.7pc.
You’ll recall this is tame compared to CPI’s 11.1pc peak from October 2022. What’s more, forecasts are squishy and measures are notoriously inexact (usually wrong) and were so even before the Office for National Statistics’ (ONS) problems when Labour Force Survey response rates came to light.
Still, spare a thought for Bailey when he writes that letter. No evidence exists – none, zero, zip – proving the BoE or any central bank can fine-tune inflation or any other measure precisely, or that the indexes are even accurately reflective.