Inflation target is still far away

The EU’s stats house, Eurostat, confirmed on Wednesday that euro zone inflation slowed to 4.3 per cent last month, in what has been seen as good news for those who want the European Central Bank at the very least to not hike interest rates when it meets next week.

There was less good news for those who would like to see the Bank of England (BoE) hold rates steady at its next meeting in November.

That’s because prices increased by 6.7 per cent in the year to September, holding steady on the previous month when economists had been forecasting the rate to slow once again.

The UK experience highlights the uncertainty around the inflation outlook in general. We are all trying to read the tea leaves, looking for any hint of which way price growth may go and what might happen to interest rates.

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Yet the macroeconomic picture could change rapidly with little warning. The events in the Middle East in recent days highlight how tenuous things are. Is there a possibility of a fresh oil shock? Benchmark crude prices jumped 2 per cent on Wednesday amid the explosion at a hospital in Gaza that killed hundreds. There is little doubt that tensions are high and investors are nervous.

While inflation (outside the UK) has trended broadly down in recent months, the last few ticks down to central bankers’ preferred 2 per cent level is likely to be the most difficult part of the puzzle. We are already seeing that play out in Ireland: the consumer price index dipped to 5.8 per cent in July but has ticked back up since, hitting 6.4 per cent last month.

Oil prices inching up will eventually feed through to so-called imported inflation as petrol increases and adds to the cost of everyday items, putting further upward pressure on prices.

Central banks in general were late in their initial response to inflation two years ago, but have since been steadfast in the fight against what is a tax on the poor more than anyone else.

But when inflation is imported from abroad, there is little central bankers can do to control it.