By Max Clarke

Tomorrow will see the publication of the Bank of England's quarterly inflation report, and with it will come the admission that the Bank's Monetary Policy Committee (MPC) has again failed to adhere to its consumer price inflation (CPI) rate of 2%.

The damage to SMEs, and therefore to the economy, that this inflation is causing has been discussed. One way for the committee to curb this inflation would be to raise interest rates from their historic 0.5% low. This, however, will cause problems of its own, and may even derail the recovery, as Jeremy Cook, chief economist at World First explains:

“Ahead of tomorrow’s full Inflation Report this latest number will further increase pressure on the MPC to bring these price rises back into line. Price stability is, after all, the Bank’s primary mandate.

“It’s obvious that the inflation picture has increased recently on the VAT hike. We have seen some retailers withhold the price increase with clothing and footwear prices falling by 5.3%. Even so, prices will rise further before they fall.

“However, I firmly believe that they should hold fire and wait for the recovery to become less patchy.

“Nobody wants to be blamed for snuffing out a recovery. A rate hike to contain inflation, when most of it is imported anyway, would be like throwing the baby out with the bath water.

“That said, if they don’t put rates up in March I don’t expect to see a rate rise until May.

“The MPC tend to wait for inflation reports before tampering with monetary policy, interest rates or otherwise, and given the lack of movement in February’s meeting I expect them to wait until the data for May’s report is forthcoming, before seriously considering a rate increase.”

Speaking about the impact of the recent high inflation is Dave Prentis General Secretary of Britain's public sector union UNISON:

“The misery keeps piling on for families across the country. Food and gas prices are soaring. For low paid public sector workers stuck on a pay freeze for up to three years, making ends meet is a daily battle.

“It’s quite another story in the city — where all this trouble started. Barclays investments bankers are getting bumper salary rises. Other bankers are still getting huge bonuses.

Topics