Business leaders angry over inflation rise as MPC defends its policy

WEST Midland business leaders have expressed deep concern following the unexpected rise in the monthly inflation figures.

Figures from the Office of National Statistics showed that CPI inflation rose 0.2% to 2.6% in July, while the retail price index rose to 3.2%.

Businesses in the West Midlands said the return to rising inflation after four months of decline was worrying and have blamed the situation on increased air fares and the gradual re-strengthening of sterling.

Michael Ward, president of Birmingham Chamber of Commerce, said: “The economy has proved once again that it can fly in the face of predictions from the Bank of England, who last week cut growth forecasts and predicted that inflation would fall.”

Ironically, the figures came as a representative of the Bank’s Monetary Policy Committee was visiting Birmingham to talk to businesses about the impact of low interest rates.

Mr Ward said the shock rise demonstrated that even the Bank had no real control over inflation.

“So it is important that government policies do not add to inflation or dampen demand,” he added.

Greater clarity on the Bank’s role came from deputy governor Charlie Bean, who said quantitative easing still had a role to play in helping aid the recovery of the UK economy.

Speaking in Yorkshire, Mr Bean said he rejected criticism of the Bank’s economic forecasts and expressed confidence inflation would resume its downward course despite yesterday’s increase in the headline rate.

He was speaking as he visited businesses to gather information to help the MPC in its decision-making, which last month saw the extension of the QE programme to £375bn.

Three consecutive quarters of negative growth have led to scepticism among some commentators over the value of further QE and concerns over the risk to inflation.

Mr Bean told TheBusinessDesk.com: “It is very difficult to deduce anything on the effectiveness of quantitative easing purely from looking at the growth numbers.

“The real question you have to address is what would have happened if we hadn’t undertaken those asset purchases? What would the economy have looked like? We can observe pretty directly the impact of quantitative easing on asset prices, gilt yields, corporate bonds, equities, and there we can see the transmission mechanism is working pretty much as we expected it to. What’s a bit harder is to assess the consequent impact on demand in the economy.

“But certainly as it stands at the moment we think there’s some traction from quantitative easing.”

The Bank has forecast CPI inflation falling back to its 2% target later this year and Mr Bean insisted the latest rise, to 2.6%, did not undermine that prediction.

“The number was not significantly higher than we were expecting. It’s true that some of the city commentators had a rather lower expectation but it may be they hadn’t looked sufficiently closely at what was happening to the various components.

“I don’t think the number is likely to change the big picture which is that inflation is likely to continue edge down during the second half of this year and into next year.”

The latest Inflation Report last week saw the Bank cut its growth forecasts for the year triggering criticism over the accuracy of its projections.

“We don’t seek to provide point forecasts on growth or inflation,” Mr Bean said. “What’s really relevant for policymaking is not picking some central path which almost certainly is not going to materialise, it is identifying the main risks in either direction and setting policy recognising the balance between those two.”

Mr Bean acknowledged growth had been weaker than projected and that had been reflection of rising commodity prices, tensions in the Eurozone and the cost of funding to banks. He insisted inflation had behaved “pretty much as we expected”.