Inflation pressure in the UK economy eased slightly in the latest month, with the “all items” CPI falling from 2.4% annually in June to 2.1% in July. Inflation for food and drink remained negative at -0.6%.
This may offer some comfort, since it supports the Bank of England’s view that rising inflation will be transitory and that no action is required to correct it.
However, other ONS data shows that inflation pressure acting on businesses remains strong. Prices for materials and energy are still rising strongly, impacting manufacturers. Wages are also rising fast, impacting service providers.
So far, these cost increases have not yet been passed on to shoppers, but it seems likely that this will happen at some stage.
The general upturn in economic performance and shopper confidence mean that this may be anticipated in the fairly near future, since the economy is strong enough to tolerate it.
Looking to the slightly more distant future, it is likely that global economic recovery from COVID-19 will continue to push up prices for many key industrial inputs.
In addition, climate change – and efforts to address it – will likely create supply side pressure for basic agri-food goods.
Long-term demographic trends also suggest that labour supply will become increasingly constricted, diving wages up.
On balance, it seems likely that inflation in years ahead will be higher than in the recent past, presenting challenges to monetary policy.
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