UK inflation rose slightly over October to 0.7%, up from 0.5% for September. Though most analysts had expected the rate to stay flat at 0.5%, last month’s increase was due in large part to rises in the cost of clothing and food.
There’s good news and bad news here. Let’s get the bad out of the way first.
We shouldn’t get too carried away on the back of these figures. Yes, that 0.2% rise is slightly higher than expected, but inflation still remains at a historically low level, and sits well below the Bank of England’s 2% target.
All this reflects a disinflationary environment of low real wage growth and rising unemployment levels.
What’s more, the immediate situation in October, which today’s figures reflect, was more positive than what we’ve experienced so far over November. While infection levels continue to rise, the return to lockdown will only worsen unemployment levels and further reduce opportunities for spending.
The reality is that inflation is likely to remain subdued, and probably creep back down towards zero again as November takes its toll.
But there is good news too. We know that a vaccine is our best shot at ridding us of this virus - it may help cure our inflation woes too. The vaccine should ultimately reopen the economy and give prices the shot in the arm they’ve been looking for.
In the meantime, the good vaccine news combined with the increase on figures, however slight, means that the Bank of England is unlikely to dip into negative interest rates. That’s good news for savers, for whom the prospect of even lower returns may have seemed mystifying.
But if the vaccine offers a light at the end of the tunnel when it comes to the virus, the situation is slightly less clear when it comes to inflation. We can’t be sure exactly how long that tunnel goes on for or where exactly the light will take us.
After being stuck in a disinflationary rut, rising inflation feels like a good thing. That’s true, but only to a certain extent. Nobody wants inflation to get out of hand - that’s why the Bank of England sets its 2% target. Too little and you curtail growth, too much and value is unduly eroded.
We often see a hefty rise in inflation following a recession. A repeat this time around may not come as a surprise. In fact, given the huge levels of debt the government has raked up this year, there’s concern that tax-rises alone won’t cut it and that a steep rise in inflation is inevitable as a way to offset those debts.
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