Inflation figures that match the Bank of England’s 2% target present a problem for policymakers and the new prime minister.
The Office for National Statistics reports that the average by which prices increased (CPI inflation) was 2% in June 2019.
The alternative CPIH, which includes housing costs, was 1.9% for June.
While this figure is more or less right on the target set for the Bank of England by the government, the slowing global economy, potential no-deal exit from the EU, and rising wage growth all present headaches of different natures for those with their hands on the levers.
Ahmer Tirmizi, investment manager at 7IM, thinks this presents a headache for the Bank’s Monetary Policy Committee (MPC), which sets the bank base interest rate.
Mr Tirmizi says: “The latest inflation data follows yesterday’s strong labour market data. Unemployment remains at its lowest rate since the 1970s while wage growth hit an 11-year high. The last time wage growth was trending up like this, interest rates were over 3%.”
Typically the higher inflation gets, the higher the Bank of England will raise interest rates to dampen consumer spending. However, in recent years this link has been broken and interest rates have remained at record lows since the financial crisis.
“The central bank has signalled it wants to get monetary policy back to normal. However, the bond market is expecting central banks across the world to cut rates and thinks the MPC should follow suit. Central banks don’t often fight the markets,” adds Mr Tirmizi.
Phil Smeaton, chief investment officer at Sanlam UK, thinks that Brexit will come back to the forefront as the Tory leadership contest ends next week, and the focus returns to the Halloween deadline. Mr Smeaton also thinks that the spectre of stagflation now haunts Bank governor Mark Carney.
He says: “The scenario of weaker growth and higher inflation, commonly known as stagflation, is an increasingly possible outcome.
“Sterling weakness and solid wage growth mean that Mark Carney will be keeping a watchful eye on the data, but there is a pragmatic reluctance to apply the brakes while the UK’s political situation is so uncertain, and he may be called to make a tough decision on rates sooner than he had hoped.”
Mr Tirmizi adds: “Furthermore, the threat to the UK economy posed by a no-deal Brexit and Boris Johnson’s pledge to exit the EU with or without a deal is likely to play on the MPC’s mind.
“Indeed, as MPC member Gertjan Vlieghe signalled, if there was a no-deal Brexit then the central bank could even consider moving to cut interest rates again to a record low.
“However, what Boris the leadership candidate says on Brexit is likely to be different to what Boris the prime minister does on Brexit. The MPC is likely to be in wait-and-see mode over the coming months.”
This article was first written and publish by our sister magazine Moneywise.