Troublingly, the public no longer thinks inflation will keep falling
A angst accompanied Britain's early-morning inflation releases in 2022 and 2023, when prices were rising at a pace not seen in decades. Lately, the mood has been calmer. But new figures for April, published on May 21st, brought unwelcome flashbacks to the economists, traders and mandarins watching the data.
Annual headline inflation rose from 2.6% in March to 3.5%, blowing past forecasters' expectations of a 3.3% rise. Core inflation, which strips out food and energy, rose to 3.8%. Rather than reflecting a broad surge, though, these increases had a more prosaic cause: changes to a few regulated prices, which reset at the start of the financial year in April.
Water and energy bills, as well as vehicle-excise duty, a car tax, explain nearly all of the increase. Water bills rose 26% in April after Ofwat, the regulator, allowed firms to charge more to fund investment. Previously announced rises in national insurance (a payroll tax) and the minimum wage both bit as well, and may have pushed up prices in shops. Air fares were lifted by the holidays.
Strip out regulated prices (water bills and the like), and a sunnier picture emerges. The Economist calculates that annual core inflation excluding regulated prices was 2.7%, about the same as in March (see chart 1). That remains higher than the Bank of England's 2% target, but not by much.
Still, Britain cannot afford to relax entirely. However easy it is to slice misbehaving prices out of charts, ordinary Britons still notice when their bills keep rising. And, four years on from the initial surge, surveys suggest that households don't expect inflation to fall much at all over the next year or so.
More troublingly, many Britons now also believe it will stay above 2% for several more years, and possibly indefinitely (see chart 2). That belief, if it sticks and spreads, could seriously dent the credibility of Britain's inflation target. One reason why inflation has declined by so much in Britain and across the rich world over the past two years is that households expected it to fall -- and so didn't push for the sorts of wage increases that could have set off a self-reinforcing spiral of higher prices. That faith has now been shaken.
As a result, some rate-setters at the Bank of England, including the chief economist, Huw Pill, are now fretting publicly about a possible regime shift in price-setting. For decades, Britons were able to blithely ignore inflation. Now that households and businesses are paying attention, so the theory goes, they are less willing to simply trust that any inflationary shocks will soon pass. Too many more months like April, then, even if the causes are genuine one-offs, could add up to a real problem.
Across the Atlantic, April also marked Donald Trump's escalation in tariffs. Worries about moderately above-target inflation may well look quaint, if American protectionism begins to choke global growth. A cruel month for central bankers -- and consumers.■
