Central banks are hoping that by putting interest rates up, the level of aggregate demand in the economy will fall, which would reduce the demand for labour in the economy, and put downward pressure on wages.
Similarly, chancellor Rishi Sunak is under pressure from his political opponents, and some of his political allies, to take action to boost economic growth and alleviate pressure on household spending.
The latest indications from the government is that such measures may be introduced in the summer, but the government is waiting to see whether the volatile piece of the inflation number persists and leads to core inflation.
One concern fiscal policymakers may have is that the energy price inflation begins to wane in the autumn, just as the impact of higher government spending is being felt in the economy, effectively swapping the short-term energy-price-led inflation for inflation from the government spending side.
Conversely, by not increasing spending now, the government are (whether intending to or not) causing people to reduce their spending and so may be pushing down demand in the economy, placing a lid on the core inflation number.
If energy prices are going to subside later in the year anyway, then measures taken now to address higher inflation are unnecessary, and are in fact serving only to reduce economic growth now.
Commenting on the US core inflation picture, Silvia Dall’Angelo, senior economist at Federated Hermes, says the core inflation numbers we are seeing now do not yet fully reflect the impact of the war in Ukraine.
She says: “As widely expected, US headline CPI inflation declined slightly to 8.3 per cent in April, from 8.5 per cent in March. However, details did little to assuage concerns about underlying inflationary trends, showing price gains remained pervasive and sustained on a sequential basis.
"Indeed, while energy prices moderated in April, core prices (excluding energy and food) accelerated to a 0.6 per cent monthly increase, compared to 0.3 per cent in March. As a result, core inflation edged down by less than expected in April – with the decline entirely due to favourable base effects.
"Inflation might have peaked in March, but it will likely remain sticky at elevated levels for the balance of the year, reflecting considerable external and domestic price pressures that are still in the pipeline."
Dall’Angelo adds: "The full impact from the increase in commodity prices due to the conflict in Ukraine has still to make its way through into consumer prices, with food and transportation services likely to record further large increases in coming months.
"In addition, the labour market is tight, meaning that wage pressures will remain sustained, so higher labour costs will put upward pressure on consumer prices."
