But low inflation should not blind central bankers to the need to begin normalising interest rates
The Institute of Directors has said that negative inflation should not concern businesses and economists just yet and reiterated calls for the Bank of England to normalise interest rates.
Michael Martins, economic analyst at the Institute of Directors, said:
“There will be plenty of people ready to celebrate another month of rock-bottom inflation. Falling food and fuel prices have boosted the spending power of households across the country and businesses can spend less on moving goods and people across the world and more on paying down debt, investing in equipment, hiring staff, or offering pay rises. This has led to impressive pay growth and productivity gains in the private sector after years of stagnation and should see business investment continue to grow.
“Inflation has hovered around zero for a little longer than we might have expected, but it is not yet time to sound the alarm bells. The real test will come around the turn of the year, when last year’s dramatic drop in the price of oil falls out of the calculations and we should see inflation start to climb back up. For the moment, this is still a win-win scenario for businesses as demand picks up and the cost of resources comes down.
“We remain concerned that this temporary period of abnormally low inflation is blinding central bankers to the need to begin normalising interest rates. The Bank of England’s job is to set interest rates for the medium-term, where inflation is set to pick back up towards the two per cent target. Core inflation, which strips out some of the more volatile factors putting downward pressure on the headline rate, remains a steady one per cent. Every month where interest rates linger at 0.5 per cent, Carney binds his hands a little tighter and takes options off the table for the future. After such a prolonged period of extraordinarily low rates, they will have to rise gradually and incrementally, but the longer we wait the harder that will be.”