Spud’s inflation forecast

Britain will fall into recession by the end of this year or early next year, a top City investment chief has predicted, following the bond market turmoil.

Luke Hickmore, investment director at asset manager Abrdn, said the “real surprise” of rising core inflation in Britain’s economy would force the Bank of England into action on interest rates.

This in turn will lead to surging mortgage costs, which will put people’s incomes “under a lot of pressure”, he warned.

The prediction comes days after the IMF forecast that the UK will no longer suffer a recession this year.

Government borrowing costs have surged since data on Wednesday showed core inflation in the UK economy, which strips out volatile food and energy prices, increased to its highest level in 31 years to 6.8pc in April.

Markets are pricing in that the Bank of England could raise rates as high as 5.5pc by the end of the year, which has suppressed bond prices and sent the cost of Government borrowing surging.

Note that at that point we’d still have negative real interest rates.

But.

Spud’s insistence that inflation is going to disappear because food and energy inflation are coming back down. Just shows how well grounded he is in basic monetary economics. The very reason we even have this concept of core inflation is because everyone knows that food and energy are highly volatile. So, sometime – sometimes – we strip them out so as to see what are the inflation rates looking like across that core of the economy.

For example, the Fed is known to use core PCE (personal consumption expenditure) as its target for that 2% goal. It did all through QE and near zero rates. To be consistent it probably should now, too, right?

To put this another way there is no “the” inflation rate. There are a number of different ways of measuring, each of wihch illustrates but does not define the phenomenon. The one central bankers actually worry about is core inflation (whether RPI, CPI, PCE or whatever). Because if we do get into a self-reinforcing inflationary spiral that’s where we’d see it.