Sticky inflation leaves the Bank of England in a bind

The unexpected pickup in UK inflation to 3.6% in June, from 3.4% in May and just 2.0% in the same month a year earlier, will add to economic uncertainty and the downside risks to spending and investment.

The Bank of England is still likely to trim interest rates again next month, especially if tomorrow’s jobs data are weak.

The latest inflation data are only just above the Bank’s own forecasts, which still see the CPI measure dropping back to the 2% target next year and staying there over the medium term (the horizon that matters most for monetary policy).

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In the meantime, consumer and business expectations for inflation are stable, surveys suggest that underlying wage growth is now cooling, and growth in broad money is easing from an already slow pace.

Nonetheless, the gap between inflation in the UK and the euro area has widened markedly since last October’s Budget.

The obvious culprit is the continued pass through of higher payroll costs following the large increases in employers’ National Insurance contributions and in the national minimum wage.

It was always likely that these policy choices would backfire on ‘working people’, both by raising prices and cutting jobs. But they are clearly making the Bank of England’s task a lot harder too.