Inflation falls but consumers still feel financial pain

So inflation has fallen! Hurrah! The inflationary dragon is tamed. It is now “only” double the target with the Consumer Price Index now 4 per cent for March according to today’s figures. Yet this is likely to be a temporary pause before a resumption towards 5 per cent next month, when the full effect of Budget excise hikes is passed into the stats.

The squeeze on our living standards is still very real. Transport prices were still by far the biggest contributor with a 15.9 per cent rise in fuel prices in the year to March. Although prices are up between February and March, the inflation rate fell from 4.4 per cent to 4 per cent because of what happened in the same months last year. The biggest ray of light was that food prices did fall, as the weather impact on commodities began to calm. The blot on the landscape, however, is domestic energy prices, with gas bills likely to follow wholesale gas prices sharply up. Another source of pain. It might be called the Fukushima effect.

The immediate impact of this is that it weakens the chances of a May rate rise. It strengthens the fence-sitters hands on the Bank of England’s Monetary Policy Committee. Perhaps arch-hawk, Andrew Sentance will not after all, get his valedictory rate hike. Much will depend on the Q1 GDP figure out in a fortnight, I suspect. The shockingly bad British Retail Consortium figures out this morning, showing a 3.5 per cent slump, the worst since its surveys began 16 years ago, will also strengthen the dove’s hand. As Phillip Green commented last month, the UK consumer really did fall off a cliff last month.

Read more: The economy – from crash to cuts

There is a bigger picture too. Our elevated inflation comes with an at best stagnating economy, and relatively, in UK terms, high unemployment. Compare with Germany, where there is much concern about “high” inflation of just 2.3 per cent, whilst unemployment is low at just 6.3 per cent, and GDP is growing. It suggests of course that the difference is not just a more productive economy, but also that we are getting the bad inflationary impacts of the sterling depreciation without really seeing the full benefits on the economy.

Two MPC members (Weale and Sentance) have now begun to talk about the sterling-inflation nexus. I was confronted by a European economist who pointed to the fact that Britain has only just begun to work out it is poorer as a result.

Everyone seems to agree that the fall in the pound that occurred in 07/08 is essential to the Great Rebalancing. I wonder if that consensus is unravelling.