Are there signs inflation has peaked?

Is the inflationary spike past its peak? That is the obvious reaction to the news that US inflation fell to 7.7 per cent in October, down from 8.2 per cent in September and significantly lower than the 8.0 per cent that markets had been expecting. Clearly, inflation remains high, but US inflation is now lower than at any stage since January. A further couple of months of falls would seem to indicate that, for now, inflation has been tamed.

It ought to come as no surprise. The US Federal Reserve has been fighting inflation aggressively all year with interest rates. It is some way ahead of the curve being followed by the Bank of England and the European Central Bank. Moreover, a slowing economy ought to bring down prices as consumers draw in their horns. Falling inflation is a piece of good news which has been caused by bad news: falling demand.

Stock markets and bond markets on both sides of the Atlantic rallied in reaction to the news, with the FTSE 100 jumping by more than 1 per cent and the FTSE 250 jumping by 2 per cent. Smaller company shares have been pounded all year, so this is a minor recovery in the context of overall performance, but a sharp daily rise nonetheless. Nevertheless, the FTSE 250 is now more than 10 per cent off its October lows.

Just because inflation appears to be past its peak in the US doesn’t necessarily mean we are past the peak in Britain. The Consumer Prices Index (CPI) did fall back slightly from 10.1 per cent in July to 9.9 per cent in August, but then rose back to 10.1 per cent in September. Britain is certainly behind the US in inflationary trends and has a more acute problem – along with the rest of Europe – with energy prices.      

Yet there are signs that inflationary pressures are beginning to ease. Wholesale gas prices peaked in late August and are now at less than half the level they were then. Crude oil prices have been fairly flat for the past three months. Yesterday Lord Wolfson, chief executive of Next, said that input prices for factories are now on a downward trend.

The question now is whether we can avoid an inflationary spiral whereby rising prices feed through to rising wage demands and awards, which in turn feed through to further price rises. At present the signs are promising: in the past 12 months average wages in Britain have risen by 5.4 per cent, well below the inflation rate. That could change, however, if the government were to give in to wage claims such as the 17.6 per cent rise demanded by the Royal College of Nursing, whose members have just voted for a strike in more than a hundred NHS trusts. Tube drivers and civil servants are also feeling lucky, in that they have voted for strikes over wage demands.

If the government resists – which you hope it would, given the noises that have been coming out of Numbers 10 and 11 in recent weeks, then an inflationary spiral might be avoided. But as things stand it may well take a second Winter of Discontent before we are out of the inflationary woods.