Since the beginning of the year, the UK inflation rate has steadily deteriorated. Today's numbers were particularly grim. The headline CPI rate hit 4.4 percent, jumping 0.6 percent in just one month, hitting a 15 year high. The rate has increased in 9 out of the last 10 months, and it is now 2.6 percent higher than a year ago. As for the government's 2 percent target, it is now a dim and distant memory.
The numbers from the more accurate the retail price index numbers were worse. The RPI inflation rate is now 5 percent. Ironically, mortgage payments have been putting downward pressure on inflation. If this item is extracted from the RPI series, then inflation is running at 5.4 percent.
It isn't too hard to see where the inflationary pressure is coming from. Food inflation has gone retro; we are back to 1970s levels of food price increases. This month, the food inflation rate was over 13 percent. This number is even more extraordinary considering that back in the middle of 2006, food inflation was actually zero.
Looking forward, the underlying inflationary indicators are all extremely bad. Producer price inflation is in double digits. Input price inflation is now running at 30 percent. It all suggests that inflationary pressures are increasing not diminishing.
This points to the distinct possibility that inflation could hit 5 percent by the end of the year. All it would take would be the monthly CPI inflation rate to be around 0.45 for the rest of the year. For the first six months of this year, the average monthly rate has been 0.4, although in the spring, the rate was well in excess of 0.6.
For the MPC, today's number must produce more than a twinge of regret. A more robust response to inflationary pressures a year ago would have limited the extent of inflationary pressures that are all to evident today. Since the first signs of renewed inflation appeared, the MPC took a gamble, cut rates and lost badly.
For the MPC the dilemma has become more acute. With inflation rapidly approaching 5 percent, inflationary expectations are bound to rise. Wage setters are quickly picking up the signal that the MPC is scared to raise rates. Therefore, it is only sensible to conclude that the BoE will accommodate higher wage increases. Given that these are the new rules of the game, only a fool would not push for at least a 5 percent or more pay increase next year.
The MPC has only one way out of this mess; raise rates. The sooner they do it; the sooner everyone else will understand that any further acceleration in inflation will not be tolerated.
So far, the MPC seem reluctant to take any tough decisions, preferring to keep them on hold in the hope that something might turn up. It seems more inclided to ride its luck, hoping that a modest slowdown in activity might have a huge impact on price pressures. Unfortunately for the rest of us, the committee appears to be a little short on good fortune right now.