Martin Flanagan: Soldiers of misfortune may help win inflation battle

THE inflation bubble abides, but the balance of probabilities remains that it is more likely to pop as we go through next year.

Even so, the 5.2 per cent figure for September is still at an altitude for nosebleeds following already high inflation of 4.5 per cent in August.

The latest number is right at the top of City expectations and is depressing news for consumers. Key factors in the jump are rising food, utility and transport prices, all of which hit poorer households in particular as they are largely not areas of discretionary spending.

It is a mark of how the inflationary backdrop has hardened that in March the Office for Budget Responsibility (OBR) forecast inflation would be 4.3 per cent in September. So the outcome is just under a full percentage point above what the official advisory body to the UK government was expecting.

The data also has implications for the country’s stretched public finances. The September inflation number is used as a guide to upgrade social security benefits from April for the next fiscal year and so it means Whitehall spending on pensions and other benefits could be £1.2 billion more in 2012-13 than the OBR estimated.

Things could also get worse before they get better. All of Britain’s “big six” utility companies have announced price rises this year, putting more pressure on household incomes and potentially raising October’s inflation figure as these high costs come in to force. After yesterday’s jolt, many City economists are already increasing their inflation forecasts for next month to 5.3 or 5.4 per cent.

Having said the above, countervailing inflation winds are on the horizon, which suggest the Bank of England’s monetary policy committee may still be proved right in its prediction that inflation will fall sharply next year.

Not least, the VAT hike in January drops out of the calculation in 2012. Oil, food and commodities prices also all jumped late in 2010 and early this year, so the year-on-year inflation impact should start to fall – unless there are unexpected further price hikes in these areas.

Furthermore, given our enfeebled economy, only anaemic growth is widely forecast for 2012. This will also bear down on inflation.

Even if Britain avoids the increasingly even‑money prospect of double‑dip recession, unemployment is expected to rise at least for the first part of next year. This should also bring down inflation as consumer spending and wage growth remain subdued.

The latest rising consumer prices index is another component of the choppy economic waters we are in. It is a further jolt to sentiment.

But, unlike some other macro uncertainties – see my next item – the war against inflation does at least have some soldiers on the horizon.

European woes may yet land at Britain’s door

IT IS a sobering thought that, whatever Britain does on the fiscal austerity front, we are not sole masters of our economic destiny. In a speech last night, Sir Mervyn King, Governor of the Bank of England, made the point starkly.

Austerity is not the only game in town. And there’s only so much the UK authorities can achieve with lower interest rates – they are already at historic lows of 0.5 per cent – and quantitative easing. With the major economies –not least the flailing eurozone – so interdependent, “our fate rests to a considerable extent on the policies pursued by our trading partners”, King said.

The Governor’s warning rightly emphasises that we are not in a position to look loftily on at Europe’s turmoil as some sort of grotesque spectator sport. We are not in the euro, mercifully, but we are in the scary ramifications of the European crisis up to our chests, if not necks.