The decision of the Bank of England to freeze interest rates, has been over shadowed by the news inflation has made an unexpected jump to 1.9%.
Debate on interest rates currently centres on whether the first hike in rates will come before the end of the year or not. Perhaps a rate rise in November will have a more significant impact on the Nation’s psychology than if Mark Carney waits until early 2015.
The question of course is the extent to which there is “slack” in the economy. This latest rise in inflation will be worrying. That said, wages are still rising less than inflation, meaning they are falling in real terms and with this latest inflation figure, falling more sharply. Precisely the reason why people say they don’t feel better off, while the economy broadly improves.
Over the last couple of months the Bank of England has been accused of giving out mixed messages on the likely timing of a rate rise. Any pronouncement by Mark Carney has a significant impact on expectations. The sense that we may be heading for an earlier than expected rate, might just be one way the Bank of England hopes to encourage us all to get our house in order before we really have too.
Before the inflation figures were released, opinions were divided about the need for a rate rise with business leaders urging caution. The view from some is that the risk of rising rates too soon poses a greater threat to the economy than waiting too long.
So what now?
As with any important measure of the health of the economy it’s unwise to read too much into one month’s figure whether better or worse. Looking more closely at the data driving the jump in inflation, women’s wear was largely to blame. With most of the UK enjoying better than average weather it seems retailers delayed sales, leading to higher prices.
As usual, it’s a case of wait and see.