City thinking, local knowledge

Inflation: Just how High Could it Go?

By Questa Chartered

As the world’s economies recover from the pandemic, there seems to be one spectre that is haunting them all: the threat of inflation.

In China, factory gate prices are at their highest level for 26 years. Early in November, it was reported that US inflation had risen to 6.2%, rising at its fastest rate for three decades, driven by increases in the cost of food and fuel. That last one could go higher yet: the price of gasoline (petrol) is at a seven-year high, with the Bank of America predicting that the price of oil could rise almost 50% to reach $120 a barrel by the middle of next year. That would obviously drive up the price of petrol, which would increase not just the cost of filling our cars, but also fuel costs for distribution companies.

How bad could it get in the UK? Early in November, consumer price inflation fell back slightly to 3.1%, but the Bank of England expects it to reach 4% by the end of the year. Huw Pill, the Bank’s new chief economist, has spoken of inflation reaching 5% by ‘early next year’.

That’s the official view. Anecdotally, there are more worrying signs. Supermarket price inflation has reached its highest level for more than a year, according to industry figures, with ‘grocery price inflation’ reaching 2.1% in the four weeks to October 31st. Prices were rising fastest in areas such as savoury snacks and crisps, while falling in bacon, fresh vegetables and cat and dog treats.

The supermarkets are blaming the higher cost of energy and commodities – and the one we’ve heard so much about over the last few months, problems and shortages in the supply chain.

This, of course, is an area which impacts us all. The Bank of England can say what it likes, but we have to go to the supermarket and many people doing their weekly shopping will treat the official figure of 3.1% inflation with some scepticism.

We may also be short of some Christmas cheer thanks to inflation, as the hospitality sector wrestles with what it describes as ‘terrifying’ inflation – thanks to supply chain problems and labour shortages – running in the 14-18% range. Less than good news for the traditional office Christmas party…

Central bankers – on both sides of the Atlantic – do say that inflation will be ‘a temporary phenomenon’. The Chancellor re-iterated those views in his recent Budget speech, stating that he had written to the Bank of England stressing the need to keep inflation in its ‘target range.’

That’s why Huw Pill described the Bank’s recent discussion on interest rates as a ‘live’ one. Most experts had been expecting a rise in rates to curb inflationary pressures: in the event the Bank left rates at their record low of 0.1%, at least for the time being.

But – as the old saying goes – it’s an ill-wind that blows no good. As we noted above, prices of bacon and pet treats are falling. If you’re fond of a bacon sandwich and you own a cat and a dog the world may not look such a bad place after all…

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