Belfast Telegraph

High inflation putting brakes on a recovery

In the rubber tyre sector, inflation is a good thing. Well, it is to a certain extent, perhaps 30 pounds per square inch for your run-of-the-mill car tyre (bear with me here, this is going somewhere, honest).

Above this the ride gets very bumpy and you're liable to a blow out, below this and you'll ruin the tyre after a few miles.

In the economy, the same is true. The 30 psi, zero index of the UK economy is 2% inflation, a figure which the Bank of England has set out as its target rate to keep the economy on the right track.

This column has talked in depth about how the bank can manage the inflation rate but up until now the Monetary Policy Committee has had to sit on its hands for fear that its most potent tool - an interest rate hike - could damage a fragile recovery. But if latest indications are anything to go by, inflation itself is doing just that.

Tesco posted some relatively strong results yesterday but says consumers are having to direct some of their spending to pay for petrol at the expense of their "normal" shopping. The price of oil is definitely one of the inflationary factors the bank can't control and if OPEC's seemingly nonchalant attitude to sky high crude markets is anything to go by then such a phenomenon is going to remain in place for some time to come.

That's not good news for the retail sector, nor any others which depend on disposable income or indeed which are heavily dependent on the black stuff.

Of course, after saying all this you just have to take a look at the mood of the consumer to see that all may not be as black as it seems.

Consumer confidence rose at the fastest-ever pace in May on the back of some of the most unlikely factors. Apparently the warmer weather and a wealth of bank holidays helped the nation feel a bit more chipper than normal.

If that's the case then it might not be a bad idea if all you bosses out there give your staff a few more days off this month because the weather in the first two weeks of June hasn't been anything to get consumers in a confident mood.

And if you look at the consumer confidence figures in depth you can see that it really is all relative. Yes it has jumped impressively month on month but if you look at it on a yearly basis we're still well down - nine points to be exact - on May last year and well below the annual average.

Nevertheless, the rebound will please economists and should make Mervyn King and his MPC a little less reticent when it comes to tackling the still high inflation.

That means higher interest rates, the sting in the tail that is lying in wait for us when the economy looks like it's on the mend.

When that happens we'll definitely need to make sure our tyres are at 30psi.


From Belfast Telegraph