Inflation proves worse than expected

Aug 13 2008 By Andrew Hebden

IT took just 20 minutes for the first words of warning to filter through on the wires yesterday morning after the latest inflation figures confirmed what we have known for some time: prices are in danger of spiraling out of control.

The general secretary of the GMB union wasted little time in making clear that the rise of the inflation rate to 4.4% – the biggest monthly increase since records began a decade ago – would inevitably spark demands for bigger wage rises. The Retail Prices Index (RPI) – the key informer for wage claims – rose further still to 5.3%. And who can blame him? His members are being particularly hard hit by the rises which have been most pronounced in food, drink and energy bills. Alistair Darling can plead as much as he likes for restraint in pay claims but, as so often seems to be the case with the beleaguered chancellor, his words will fall on deaf ears.

Of course, it’s not just employees, but businesses, too, that are paying the price. Grainger yesterday became the latest high-profile North East company to publicly state it is looking at trimming costs in this challenging climate, but it is a trend that is replicated across the region’s business landscape.

While we should not be unduly downbeat, the reality is things will get tougher before they get better. This was underlined by yesterday’s inflation data. No one was expecting good news, but the numbers were significantly worse than expected. It is hard to see how the psychologically-important 5% mark will not be hit within the next couple of months as the latest energy price hikes take effect.

Cue anxious faces all round the table of the Bank of England Monetary Policy Committee where it is likely divisions are deepening. This could well be exposed in the minutes of the committee’s June meeting which are published next week.

The Bank will be forced to seriously re-evaluate its outlook in its three-monthly inflation report published today after previously predicting it would peak at 4%. Its forecasts for economic growth will be even more eagerly anticipated.

Businesses or homeowners banking on an interest rate cut before the end of the year would be well advised to forget it, despite figures from the British Retail Consortium highlighting a major contraction in spending on the high street. The wise bets now would be on an extended period of rate stability or an upward shift.