What will Bank governor say to chancellor about inflation drop? | Business

What will Bank governor say to chancellor about inflation drop? | Business

It is letter-writing time for Andrew Bailey. Whenever the UK’s inflation rate deviates by more than one percentage point from its official 2% target the governor of the Bank of England has to provide an explanation to the chancellor of the exchequer.

In April, inflation fell from 1.5% to 0.8% – the lowest in almost four years and the biggest monthly drop for more than a decade. So what can we expect Bailey to put in his missive to Rishi Sunak?

He might start by saying that the shuttering of much of the economy meant the April inflation rate had to include a bit of informed guesswork on the part of the Office for National Statistics (ONS) – because the usual field surveys that go into collecting prices were impossible during lockdown – but that the main reason for the drop in inflation was the collapse in oil prices, owing to a mismatch between global demand and supply.

But Bailey will also tell Sunak that underlying inflationary pressures are also weak. Clothing prices fell sharply because retailers were desperate to get rid of excess stock. The cost of travel goods were also down because nobody is travelling.

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The governor will go on to say that further falls in the annual inflation rate are likely, and could point to the ONS data for producer prices as evidence.

Producer prices provide an early indication of what is going to happen in the future because they show how much industry is paying for its raw materials and how much it is charging for goods leaving factory gates. Both input and output prices are falling.

Finally, Bailey will say that the Bank has already taken action to get the inflation rate moving back towards its target but will not hesitate to do more if necessary.

Threadneedle Street is already talking about more money creation under its quantitative easing programme and has not ruled out negative interest rates.

More stimulus is coming.

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