ALEX BRUMMER: Inflation in the headlights

Britain’s March inflation data (due on Wednesday), and subsequent releases this spring, will largely determine the performance of the economy this year.

Hope is that the February data, which showed a surprise uptick to 10.4 per cent, was an aberration.

It is particularly out of kilter with US consumer prices which are coming down with a jolt, falling to 5 per cent over the last month.

At a time of renewed public sector strikes, particularly against the NHS and patients, a fall in headline prices would be helpful both in isolating union demands and moderating the recommendations of the pay reward bodies for 2023. The Chancellor Jeremy Hunt talked forcefully in Washington of his fears that high public sector awards could create a doom loop for the economy and end up starving public services.

As for the Bank of England, it has changed its approach on inflation and interest rates.

The Bank has halted forward guidance and will take its next decision on ‘evidence’.

March consumer prices and labour market reports, together with the latest surveys, will play a critical part.

Tesco’s price drop of 10p for a pint of milk, causing Sainsbury’s to follow suit, is seen as a practical step in the right direction! Work has been done at the Bank on food price hikes but no firm evidence of ‘greedflation’ uncovered. What is more certain is that throughout the post-Covid period, the big global food groups, such as Kraft Heinz and Nestle, have valued investors above customers by prioritising generous profit margins above all else.

Both the Chancellor and the Bank are waiting for the energy price shock to vanish from consumer prices. Lags in the energy market, which come from hedging (price insurance) contracts, are unwinding. Wholesale gas prices currently stand at 30pc less than before the war on Ukraine.

As a matter of arithmetic, lower energy costs, bolstered perhaps by lower food prices, could deliver a 5 percentage point cut in consumer prices by late spring.

So where does this leave interest rates? The impression is that the Bank of England would welcome the chance to pause rates.

But there is a worry not enough improvement will be seen from the March data.

The Chancellor’s Budget measures to unblock the labour market, through childcare and pension reform, will be a slow burn.

Those reforms have drawn rare support from the International Monetary Fund, which has praised the March budget. It now says the UK’s reputation of economic management is ‘unequivocally’ repaired after the Liz Truss-Kwasi Kwarteng interlude.

Clearly the Bank will have concerns that turmoil in the banking sector will result in a tightening of credit conditions as lenders become more cautious in making loans.

Another rate increase, together with quantitative tightening (withdrawing cash from the economy), might be an unnecessary drag on a flat-lining economy in which real incomes are squeezed by high prices.

It is fascinating to see that here in the US, as the bogey of inflation shows signs of coming under control, a major political fight is brewing over the role of the Federal Reserve in both causing and battling higher prices.

Republican presidential candidate Ron DeSantis, governor of Florida, blames the US central bank for contributing to inflation by ‘printing trillions and trillions of dollars’. He accuses the Fed of then acting too aggressively in reducing rates, causing turmoil in the banking sector.

The Wall Street Journal, among others, has sympathy with DeSantis’s view that loose monetary policy, together with Joe Biden’s succession of big spending packages, are the fundamental causes of American inflation. Among advanced countries, it is only in the US, where so many citizens are shareholders, that central bank policy moves to the core of the political debate.

Andrew Bailey can thank his lucky stars that the role of an independent Bank of England has, so far, not been politicised.

Payback time

Not all US banks are suffering in the current financial turmoil.

JP Morgan Chase is among the big beasts benefiting from a flight to quality following the collapses of Signature and Silicon Valley Bank. The first quarter of 2023 saw profits at the biggest beast Wall Street soar 52 per cent to $12.62billion. Chairman Jamie Dimon modestly describes his bank as a ‘pillar of strength’ amid upheaval. Hard to disagree.