Newspaper article The Evening Standard (London, England)

Light at End of Tunnel for Squeezed Londoners?

Newspaper article The Evening Standard (London, England)

Light at End of Tunnel for Squeezed Londoners?

Article excerpt

Byline: Simon French Panmure Gordon ECONOMIC ANALYSIS

BANK of England Governor Mark Carney might be entitled to ask the Chancellor to cool down Cabinet infighting if he wants to curb inflation. Today we learned headline level of UK inflation was 2.6% in June. This annual change in consumer prices was a fallback from the 2.9% increase reported in May. But with wages increasing by just 2% over the past 12 months, this amounts to a substantial cut in the spending power of Brits, already paying food and fuel from foreign suppliers who view the pound less favourably since last summer's vote for Brexit.

The fear for London's households is that this gap between inflation and wage growth widens further in the next few months. British businesses are expected to take a cautious stand in upcoming pay negotiations and inflation is expected to increase to around 3% later in the summer.

This 3% threshold is an important one for the Bank. Under the terms of its policy independence, Carney must write to the Chancellor to explain what steps the Bank is taking to bring inflation back to its 2% target. As he sharpens his pencil, he could be forgiven if his initial draft included a line asking Philip Hammond's Cabinet colleagues to stop behaving like squabbling children.

Investors domestically and internationally are watching the UK Government's handling of Brexit negotiations and marking down the value of holding British assets, with the pound itself down 13% since last June. For an economy still running a budget deficit financed by "the generosity of strangers", this is an unwelcome backdrop. Sterling's weakness and high inflation has inevitably led to siren voices calling for the Bank to raise interest rates and prop up the currency.

There are two important reasons this would be the wrong response when the Bank's rate-setters next meet at the start of August. First, the present bout of inflation has been driven by the negative perception of the UK economy.

This is tackled far more effectively through a more coherent approach to Brexit negotiations than encouraging fickle "yield hunters" into holding pounds. Second, the bounceback in global energy prices since early last year has also contributed to inflation being above target. …

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