In January, annual inflation (as measured by the consumer price index) clocked in at 4%. The Bank of England’s target is 2%. If you use the retail price index (RPI), it came in at 5.1%. Both figures were in line with analysts’ estimates, so at least they weren’t any worse than expected. But it’s hard to take much comfort in that.
Surely the Bank of England (BoE) has to raise interest rates now? Well, we’ll see. The inflation report is out tomorrow. That’s where we’ll get a view on Mervyn King and the team’s latest thinking. And so far, Mr King in particular, has been reluctant to suggest rates will move any higher.
Mr King points to all sorts of reasons why the current inflation is ‘temporary’. And he’s not keen to raise rates and squeeze the consumer even harder when much of the inflation is in the form of rising energy and food prices.
But there may be another reason for his reluctance, one he’s not drawing quite so much attention to. And that’s the fact that credit conditions are likely to get tighter over the next year, regardless of what happens with interest rates…