Julian Jessop, Economics Fellow at free market think tank the Institute of Economic Affairs, responded to yesterday's inflation data, published by the ONS
January was a relatively quiet month for inflation: the annual rate ticked up again, to 5.5 per cent, but prices actually fell by 0.1 per cent compared to December. The main reason why the headline rate rose is that the discounts in the January sales were smaller than a year earlier, particularly for clothing and footwear.
However, this is only likely to be a brief pause in the tightening squeeze on real incomes. The producer price data this morning confirmed that there is more inflation in the pipeline, even without the hike in the energy price cap in April.
Producer output price inflation rose from 9.3 per cent to 9.9 per cent, with food prices up 6.0 per cent. Input prices increased 13.6 per cent, down only slightly from 13.8 per cent in December. Fuel costs have already risen further in February too.
Consumer price inflation will probably bobble around between 5.5 per cent and 6 per cent for a few months, before jumping to at least 7 per cent in April.
This need not be a disaster, as long as inflation then drops back sharply, and the most vulnerable households are protected in the meantime. The strong recovery in the labour market means that average wage growth is unlikely to fall too far behind prices. The rising number of people in work and improving job security will also support spending.
Nonetheless, it is crucial that policy-makers do their bit too. There is never a good time to raise taxes, but now is terrible. Rising incomes and prices mean that people (and companies) are already paying more in taxes than expected, and the Chancellor should not be adding to their burden.
The Bank of England also needs to do more to prevent a temporary increase in inflation from becoming permanent. The surges in inflation and in inflation expectations mean that real interest rates have actually fallen, despite the hikes in the Bank's official rate, which itself is still at an emergency low of just 0.5 per cent.
The Monetary Policy Committee therefore needs to be bolder in returning interest rates to more sustainable levels, as well as slowing the growth of the money supply by stepping up the pace of quantitative tightening.
Notes to editors
Contact: Emily Carver, Head of Media, 07715 942 731
IEA spokespeople are available for interview and further comment.
Further IEA reading: Inflation: The next threat? by Dr Juan Castaeda and Professor Tim Congdon