Inflation's acceleration is clear, so is the policy conundrum

While it would seem to pose a conundrum for the Bank of England, few are expecting any monetary response to the rising inflation trends that are developing in the UK. Both core and headline factory gate prices are showing the same sort of pressure building. Yr/Yr inflation at the producer level already is at 2.9% for the headline and at 2% for the core, levels that would be at or above the ceiling rate were this the CPI (HICP; actually the HICP itself is running at a 2% pace as of September). PPI price trends took a bit of a break in November with the headline rate below its pace of the previous three months; the core showed its smallest rise in four months.

The UK economy is still struggling and getting recovery going is still job-one. So it is not expected that the BOE will react to the rising inflation rate. Indeed, it is hoped that the weakness in the economy will keep these pressures from building and that the current rise proves to be a rogue wave of inflation that is not followed by any others and that dissipates harmlessly on the shores of discretion. That prognosis may prove be correct, but for the moment it seems a bit of wishful thinking. Still, if I were a BOE governor I doubt I would have the stomach to attack inflation now under the circumstances. Even so that does not make it the right thing to do. It is a conundrum of the first order.