No time has been lost in blaming Brexit for today’s rise in the Consumer Prices Index (CPI) to 2.9 per cent. It wasn’t just those on the left, either. The head of Theresa May’s policy unit, George Freeman, tweeted this morning: ‘This is reality of the devaluation of the £ post Brexit’. While George Freeman has always been a staunch Remainer, the fact he put this out is possibly indicative of a change in attitude at Number 10 – an attempt to reach out to those in the party who continue to believe that Brexit is a mistake.
Yet the longer the rise in CPI goes on the less it looks like an adjustment to a lower pound and the more it begins to look like a consequence of excessively-loose monetary policy. The biggest contribution to today’s rise in CPI was not from food, clothing or the cost of running a household – although they were all up modestly. Neither was it from transport – which saw a significant fall in prices. By far the single biggest contribution to this month’s rise was in ‘recreation and culture’. Delve a little deeper into this category and the most significant rise came in in the price of computer games. In other words, prices are rising fastest in discretionary expenditure. This is hard to square with the image of a Breadline Britain, with ordinary households struggling against Brexit-linked inflation.
Of course, if the pound falls, the cost of imported goods will rise and that will show up in a rise in CPI. But a falling pound is not the only factor behind inflation. There is also monetary policy. When interest rates fall, they stimulate borrowing and spending, driving up prices. This is, after all, the mechanism on which the Bank of England’s whole policy inflation-targeting is based. When prices rise the Monetary Policy Committee (MPC) is expected to raise interest rates in order to take a bit of heat out of the economy and hopefully counter price rises.
Yet the Bank of England has not used this tool now for an entire decade. Since the spring of 2007 all it has done is to lower rates. The last occasion – last August, when it halved rates from 0.5 per cent to 0.25 per cent – was a panic response to the referendum result. The rationale for the cut was soon shown to be wrong – the economy grew strongly last autumn. Economic growth fell back in the first quarter, but then it has been weak in the first quarter of each of the past three years, only to recover in the second quarter.
There is no runaway boom, but there is at least enough to tell the MPC that last August’s cut was an error, and that it should be reversed. It is not reasonable to keep on blaming Brexit for higher inflation and failing to recognise another obvious culprit.