With CPI inflation just 0.5% in September and new COVID-19 restrictions darkening the economic outlook again, it’s hard to think of reasons why the Bank of England won’t launch another £100bn or so of quantitative easing at the policy meeting on 5th November.
Low inflation gives the green light to more QE
- With CPI inflation just 0.5% in September and new COVID-19 restrictions darkening the economic outlook again, it’s hard to think of reasons why the Bank of England won’t launch another £100bn or so of quantitative easing at the policy meeting on 5th November.
- The rise in CPI inflation from 0.2% in August to 0.5% in September (consensus forecast 0.5%) reversed less than half of the decline from 1.0% in July and left inflation close to its recent four-year low. The rebound in core inflation from 0.8% to 1.3% was slightly stronger, but it is still well below the 2.0% target.
- The largest upward effect on both overall and core inflation came from the end of the Eat Out to Help Out (EOHO) discount scheme, which pushed up catering services inflation from -2.8% to +0.9%. That added 0.37 percentage points (ppts) to overall inflation. It reversed only about half of the previous fall from +3.4% in July as it was still being held down by the temporary hospitality VAT cut. This makes it hard to glean if the reduction in the number of tables caused by social distancing will lead to higher menu prices.
- Such supply restrictions are pushing up inflation elsewhere. The further rise in hairdressing inflation from 4.9% to 5.2% took it to a 17-year high. Shortages of printers and webcams as more people work from home appear to be contributing to the leap in inflation of data processing equipment from 1.1% to 10.9%. That’s the highest rate since this series began in 1991. And the rise in second-hand car inflation, from 5.2% to a 10-year high of 8.9%, is a result of the virus making people prefer cars to public transport. (See Chart 1.)
- With airfares inflation rising too, from -20.6% to -4.4% as prices fell by less this September than last September, total transport added 0.29 ppts to overall inflation. That said, inflation is still very low in many other areas, such as food, clothing and household goods.
- Overall and core inflation will rise further when the large falls in fuel prices drop out the annual comparison early next year, when the temporary hospitality VAT cut ends in April and on the anniversary of the EOHO scheme. By late next year, they may be close to 2%. But we suspect that the spare capacity opened up by the weak economic recovery will mean they fall back to 1.5% in 2022. In other words, the Bank of England doesn’t need to worry about inflation taking off when contemplating how much extra stimulus to provide.
Chart 1: CPI Inflation for Cars, Hairdressers & Restaurants (%)
Sources: Refinitiv, Capital Economics
Table 1: Consumer Prices
Core % y/y
Fuel % y/y
Food % y/y
Paul Dales, Chief UK Economist, +44 7939 609 818, email@example.com