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Inflation will come down but may not be soon

It is taking too long for inflation to fall, inflation hawks grumble and the medium term is becoming the long term

Tuesday saw another exchange of letters between the governor of the Bank of England and the chancellor, and another set of assurances that inflation will fall once temporary factors, such as the VAT increase, higher energy costs and higher import prices, dissipate. To the inflation hawks, the story has become too familiar – it is taking too long for inflation to fall, they grumble, and the medium term is becoming the long term.

They should hold their fire and recall what happened in 2008. In July of that year, as in July of this year, the CPI measure of inflation was 4.4%. By September 2008, the reading was 5.2% as utility firms increased prices to pass on higher wholesale costs. The same forces are at work now. Electricity and gas prices are going up and CPI seems very likely to rise above 5% within a couple of months.

In 2008, a rapid descent in the rate of inflation quickly followed, especially after the collapse of Lehman Brothers in September. By June 2009, CPI had hit 1.8%, eventually reaching 1.1% three months later.

Same again? It seems highly possible given the lack of growth in the western world and the downward pressure on the prices of most industrial commodities. There will not, we hope, be another Lehman-style catastrophe – but the parallels are a little too close for comfort. © Guardian News & Media Limited 2011 | Use of this content is subject to our Terms & Conditions | More Feeds