#568752
Postby funduffer » February 16th, 2023, 9:48 am
Of course these annual inflation indices (CPI, RPI etc.) are calculated annually based on the previous 12 months' price changes. So, when next month's change of prices is announced, February 2022's will drop out of the calculation and February 2023's will be added. The really high monthly price increases last year were after the Ukraine war started (Feb 2022), so as these months gradually drop out of the calculation, we can expect large decreases in the annual indices, barring any new big shocks to the system.
Assuming this, we may well see very low inflation, maybe even deflation, by the start of 2024 as the high 2022 monthly values wash out.
Since most of the factors that have caused this big inflation spike are 'supply side' factors - oil, gas, food, labour, micro-chips etc., I suspect what the BoE has done with interest rates will have had only a minor effect. You could argue all it will do in raising bank rate is to prolong the recession as people with mortgages will have less to spend. So, I agree, its actions are precautionary only. With wage rises lagging inflation (particularly in the public sector), I can't see how we can avoid a recession, unless people withdraw and spend their savings.
The special 'UK' factor in all this may be the shortage of labour, which might cause wages to rise more than in other countries and keep our inflation comparatively higher. Unless we see a lot of the 'economically inactive' return to the labour market (which I have my doubts about), then we may well have a labour shortage, unless we open up our borders to higher immigration. I am sure most of those asylum seekers waiting for the Home Office to decide their fate would welcome a chance to work!
Long term investment and higher productivity are of course the real answer to improving our economy, but these won't have much effect over the next year, because investment has been so dire in recent years.
I predict Rishi Sunak will easily meet his pledge to halve inflation this year, but not due to any action his government has taken!
FD