Why Inflation Bad News Is Even Worse Than You Think

If inflation is an economic illness, the cure of high interest rates isn’t working as it should

- JAMES MOORE

Falling energy bills, and the first optimistic noises on food from supermarkets including Tesco, suggested there ought to be a fall, however small, in the Consumer Prices Index. Economists polled by Reuters predicted it would come in at 8.4 per cent for May. In the end, the official number – unchanged, at 8.7 per cent – provided another crushing disappointment.

Here’s where it gets really nasty: core inflation – which strips out volatile components the Bank of England can’t do much to influence, such as food and energy – delivered a zinger right between the eyes. For the second consecutive month, it rose unexpectedly, this time to 7.1 per cent from 6.8 per cent, leaving it at its highest for more than 30 years. This is a number the Bank considers carefully because it provides a snapshot of the underlying price pressures operating in the economy; those pressures remain worryingly high. Core inflation includes the services we rely on: shop spending, tickets and transport.