The latest inflation figures show that a downward trend is now well established, with the annual rate of increase of the consumer price index falling to 6.1 per cent in June from 6.6 per cent the previous month. It is the twenty-first straight month in which the rate has exceeded 5 per cent, highlighting the impact of price rises on the cost-of-living.
It is important to try to understand what is driving the figures. The June data was heavily affected by banks passing on ECB interest rate increases. When these are excluded the annual rate fell below 5 per cent. A further decline in the headline inflation rate can be expected in the months ahead, particularly when energy companies finally start to pass on lower wholesale energy costs.
The main concern of the Government will be whether underlying inflationary pressures are taking hold, particularly in the services sector and whether this is contributing to wage increases. The evidence is mixed. Services inflation has certainly picked up, with notable recent increases in package holidays and airfares. The question is whether these pressures will ease as headline inflation is brought down by falling energy costs.
It provides a confusing backdrop for ministers as they decide on the budget package. On one side, the persistence of high prices continues to put pressure on many households. On the other, adding cash to the economy through budget tax reductions and hikes in welfare and pension payments, whether once-off or permanent, will add to demand and could push inflation higher.
There is no one right answer to this conundrum, which has both political and economic aspects. The Summer Economic Statement, while criticised by the Fiscal Advisory Council, keeps reasonable control of permanent tax and spending measures. But will this be added to by a host of additional once-offs spending measures? And if so will these be aimed across-the-board, or at those who really need them?
Persistent inflation has left some households in trouble and it is here that budgetary largesse should be directed.