The central bankers’ task is not a simple one. They are mandated to keep inflation within a very narrow sweet spot close to 2%. Much below this and the spectre of deflation and recession looms ominously, much above 2% and there is a risk of economic overheating and a dangerous inflationary spiral taking hold.
In light of this, you could argue the today’s read out of 1.8% is just right. That however would be to discount the fact that inflation is often a lagging indicator, and that being so close to the target with rates so low and a relatively weak pound is actually pretty precarious.
The full level of inflationary pressure underlying the 1.8% could be more than is manageable without quick, decisive action from the Bank of England.
If inflation does get away from Mark Carney and co, a quicker and more severe rate rise than expected may be needed to rein it back in, which would have significant knock-on effects.
Bond strategist at Investec Wealth & Investment Shilen Shah is one investment professional who sees reason for concern behind the headline number.
“Despite the headline CPI coming in slightly below consensus in January at 1.8% there are clear signs that inflationary pressures are building in the UK economy with import prices increasing by 20% y-o-y, with crude oil leading the charge,” he said. “The Bank of England’s currently neutral stance is significantly supported by its latest estimate about the amount of spare capacity in the economy, however if the path of CPI is stronger than it currently estimates, we may eventually see a stronger reaction from the central bank.”
Ben Brettell, senior economist at Hargreaves Lansdown, noted that the rising input costs for business could hit home as 2017 progresses.
