When restaurants reopened across England at the start of July, I was surprised by the rise in price of a basic burger and chips at the pub around the corner from my home. Anecdote is not evidence, I persuaded myself. My reasoning was that this must be an exception, because cautious consumers and a desperate hospitality industry would generally force prices back towards pre-crisis levels.
July’s sharp rise in UK inflation should give us pause for thought. No one should see it as the precursor to runaway prices, and we should remember that data blips happen all the time. But there is enough in the figures, at least, to highlight the limits to economic stimulus as a response to the coronavirus crisis.
Consumer price inflation rose from 0.6 per cent in June to 1 per cent in July with household goods, clothing, and petrol prices accounting for most of the increase. On their own, there is nothing to worry about in these price moves. Core inflation is similar to that in the eurozone and the overall level is still 1 percentage point below the Bank of England’s 2 per cent target.
Moreover, inflation is almost certain to fall over the months ahead. The government’s temporary value added tax cut for hospitality, accommodation and attractions should lower prices for the rest of this year. The government’s “eat out to help out” half-price restaurant discounts will temporarily cut the inflation rate when the August figures are published next month.
With job losses and a desire to shore up household finances likely to limit the recovery in consumer spending in the autumn, most economists this week felt justified in discounting the inflation figures as a blip. This may be proved accurate, but my nagging concern is that during the whole pandemic period, we have had a series of minor upward surprises in the inflation figures. These suggest that weak demand is not having its usual damping effect on inflation.
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In some of the detail in this month’s figures, it is clear that businesses are attempting to pass on the additional costs of operating in a coronavirus world on to consumers. Haircuts were 5.1 per cent more expensive in July than a year earlier, as salons had to deal with the costs of personal protective equipment and lower capacity. Similar trends were evident in private dentistry and physiotherapy.
The lack of summer sales, raising the annual inflation rate in clothing and household goods, also suggests retailers are seeking to protect margins during extremely difficult trading conditions. If retailers feel they do not have to cut prices at such an exceptional time, there is the possibility that, as sales recover, businesses will pass on more of the additional costs of Covid-19 health protection measures they have had to impose.
This would not be an inflation spiral, but could simply raise the level of prices compared with incomes. More fiscal or monetary stimulus would not limit the consequences of this supply shock. We have to pay more for some goods and services because they are more expensive to produce.
It is this limit on stimulus that is most troubling. With government borrowing costs essentially free, ministers have rightly responded during the pandemic with an unprecedented peacetime rise in public borrowing and expenditure to replace the value added normally produced in the private sector.
The signs of higher costs in the inflation figures could prove to be the first hard evidence of the persistent damage likely to be wrought by the virus and the necessity of social distancing.
So, the inflation figures are not important because the rate has risen 0.4 percentage points. But it may be a sign that I will eat fewer burgers in the local pub; you may also have to tighten your belt; and the Treasury and Bank of England may have less leeway to offset a drop in living standards than we would all wish.