Everybody has their own way of registering higher prices. For me, without sounding too poncey about it, or minimising other people\u2019s struggles with inflation, it is the price of coffee. No, not those horrible paper cups and gruesome flavour combinations you see everybody carrying around, but ground coffee for home use.<\/p>\n
The one I like, available in all good supermarkets, is from Peru and goes under the name Machu Picchu. Whether any of it is grown near that Inca architectural treasure, I cannot say, but the coffee is good \u2014 and recently it has been expensive. The discounts regularly offered by the supermarkets, which can knock a third or more off the recommended retail price, have been absent. It is enough to make you switch to water.<\/p>\n
I mention this because higher food and drink prices, partly driven by increases in commodity prices, helped push inflation higher, to 3.6 per cent last month<\/a>. <\/p>\n I have high hopes for future cups of coffee, though, because wholesale prices, which peaked in February and again in April, have come down quite sharply since then.<\/p>\n But that does not mean we will soon see a sharp drop in inflation. Second-quarter inflation was a touch higher at 3.5 per cent than the 3.4 per cent expected by the Bank of England in its most recent monetary policy report in May, though some of that was due to an error in the April data.<\/p>\n It expected then that inflation will trundle along at close to 3.5 per cent for a few months more, peaking at 3.7 per cent in September. A big increase in air fares, and the fact that petrol prices fell less last month than a year earlier, were enough to tick the rate up to 3.6 per cent last month.<\/p>\n Markets are probably right to conclude that this will make next month\u2019s decision on interest rates<\/a> by the Bank closer than it might have been, but also right to think that it will not get in the way of a cut in official interest rates from 4.25 to 4 per cent. The basis for this, unless the Bank has had a significant change of view, is that inflation will be back below 2.5 per cent in a year\u2019s time, and below 2 per cent in two years.<\/p>\n The case for a rate cut was reinforced by the latest labour market statistics, which showed that its gradual softening continues and pay pressures are easing. Total and regular pay growth has slowed to 5 per cent, from nearly 6 per cent earlier this year, despite the potential upward pressure from a big increase in the national living wage<\/a> in April. Private sector pay growth, most responsive to market pressures, is running below 5 per cent.<\/p>\n The labour market statistics are an object lesson in not rushing to judgment. The headlines were generated by a rise in the unemployment rate from 4.6 to 4.7 per cent. But, as I have written before, it is important to take the unemployment and inactivity rates<\/a> together. <\/p>\n That 4.7 per cent unemployment rate in the March-May period was up from 4.4 per cent a year earlier. Over the same period, however, there was a much bigger fall in the inactivity rate \u2014 the proportion of people in the 16-64 age group unavailable for work \u2014 which dropped from 22.1 to 21 per cent. <\/p>\n This explains why rising employment on the Labour Force Survey measure, including an increase of nearly 100,000 in self-employment over the latest 12 months, went hand in hand with a small rise in the unemployment rate. People who were economically inactive have been making themselves available for work. The number of economically inactive, just over nine million, is still high and above pre-pandemic levels, but is down by 400,000 from its peak early last year, which is good news.<\/p>\n Another lesson in not rushing to judgment was provided by the Office for National Statistics in its latest release. A month ago, it said that payroll numbers had slumped by 109,000 in May. This was reported as something close to Armageddon in the labour market, a consequence of the increase in employers\u2019 national insurance (NI) announced by Rachel Reeves in her budget last October, which took effect in April.<\/p>\n There was always something odd about that figure, which did not square with survey evidence, and sure enough, it has been revised down to just a 25,000 fall. Over April and May together, payrolls dropped by 49,000, which is more of a gentle deflating of the tyres than a blowout.<\/p>\n Finally, when it comes to not rushing to judgment, some people were quick to describe the UK\u2019s situation following the release of the inflation figures as \u201cstagflation\u201d. I realise that many doing so were too young to remember genuine stagflation.<\/p>\n The term was invented by Iain Macleod, who became Tory chancellor in 1970 but sadly died a few weeks into the role. Stagflation was a popular description in the 1970s when the UK\u2019s inflation rate, based on the retail prices index, peaked at 26.9 per cent in 1975, at the same time as the economy was in recession (the stagnation bit of stagflation), an unusual combination. Inflation averaged 12.6 per cent in the 1970s and the unemployment rate was on its way to almost 12 per cent in the 1980s.<\/p>\n We would have given our eye teeth then for inflation at 3.6 per cent, or 4.4 per cent on the retail prices index. The economy is not growing as fast as we would like, and the April and May monthly gross domestic product (GDP) readings were mildly disappointing, but there is no reason to talk it down by more than justified.<\/p>\n Language matters. Just as it is silly to talk of recession if you have two consecutive quarterly falls in GDP, each of just 0.1 per cent, so it is silly to talk of stagflation when inflation is at current levels and the economy is merely continuing the slow growth pattern that set in a decade and a half ago.<\/p>\n Above all, turning the dial up to 11 in these circumstance leaves no room for when and if things get really bad. They were quite bad for inflation three years ago, when the rate hit 11 per cent, and they were very bad for growth in 2020, when Covid-hit GDP fell by 10.3 per cent \u2014 its biggest drop since 1709. We are in calmer waters now and things are mildly disappointing, no more than that. <\/p>\n