Editor's letter

Inflation may be slipping but there is still plenty of misery ahead

Inflation may be a little lower than last month as the prices of petrol and diesel fall back, but it remains structural and long-term, says Merryn Somerset Webb. And there are no painless solutions.

Remember how last year we were told by every single self-important central banker in the West that inflation was nothing to worry about? It was, they said, mainly driven by short-term rises in energy prices and would be gone by 2022. Transitory, you see. Not structural at all.

Good news: they were right. Some of the inflation we have been seeing has been transitory and short-term. Bad news: they were totally wrong. Much more of it is structural and long-term. Look at the consumer price index (CPI) numbers out from the US and the UK this week and you will see the story in the detail. In the US, prices are up 8.3% in the year to July. That’s a little lower than last month, thanks to the fact that the transitory bits (oil and petrol) are falling back. But look to the rest and you can see that overall inflation is pretty broad-based.

Median CPI inflation (the number that omits big swings in any direction) came in at 9.2%. That tells us that we can’t just blame US inflation on a few things (such as chips and used cars). Instead, more prices are on the up than not, and the supply side is still very tight. Even now, there are two job openings per unemployed worker in the US. That is why most commentators now expect the Fed to put rates up by 0.75 percentage points next week (it has to be seen to be catching up with inflation); why the market fell so much when the numbers came out (expensive stockmarkets hate higher interest rates); and why the Nasdaq is down 26% this year.

No painless solutions to high inflation

The dynamic is much the same in the UK, where CPI inflation has fallen back from last month’s 40-year high to 9.9%. That sounds nice (it can’t be described as “double digit” any more), but there is plenty of misery embedded in the numbers. Food prices have jumped by more than at any point since 1995 (up 13.3% in the past year). Services and core inflation remain stubbornly high and unemployment bizarrely low (3.6%) – with the slight fall in it this month being largely down to drop-outs from the long-term ill (no medals to the NHS for this one).

There are no painless solutions to all this. The only people sort of winning here – or getting close to having a chance of breaking even at least – are those in receipt of the state pension. The triple lock (which Liz Truss has pledged to reinstate) looks likely to see a “record breaking” rise next year, says Hargreaves Lansdown. So that’s something.

Sadly there is another group who may soon see record-breaking rises: mortgage holders – the average rate on a two-year fix is set to have quadrupled between late 2021 and 2023. This brings me neatly to house prices. The latest numbers from the ONS showed prices rising by 15.5% in the year to July. That’s the highest number since 2003 and pushes the average house price (caveat: there is no such thing as an average house) up to just over £292,000.

This is not quite as nuts as it seems. The rise reflects the end of the stamp duty holiday in June last year rather more than it does solid fundamentals in July this year. Buy a house today and we suspect you should do so in the knowledge that your mortgage rate is almost certain to rise and, unless something very odd happens, the value of that house is fairly likely to fall.

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