What the MPC has now to decide is whether the gathering pace of inflation is cost led or demand generated. This is important because at the depth of the recession, inflation was much higher than it is now, but was created by factors largely outside the control of the Bank - items such as the price of oil and other commodities.
The handbrake would need a significant yank if inflation is caused by upward pressure on prices of goods sold resulting from an imbalance between supply and demand. But interpreting broad-based data is not straightforward. Industrial production between March and April, for example, rose by 0.4 per cent, well ahead of expectations centred on a gain of just 0.1 per cent. Within this figure, mining and quarrying output was particularly buoyant, rising 5.6 per cent. Output in mining and quarrying rose by 6.2 per cent in the first four months of the year, while crude petroleum and natural gas climbed 9.8 per cent. However, this was tempered by a fall between March and April of 0.4 per cent in manufacturing output.
If industrial production held steady in May and June, the second-quarter rise over the first quarter would be 0.8 per cent, the strongest quarterly growth rate since 2010. But manufacturing output is up just 0.2 per cent from a year ago, hit by a prolonged underperformance in exports affected by the strength of sterling, and remains 4.4 per cent below its pre-crisis peak.
All this comes at a time when annual pay growth in the three months to April grew by 2.7 per cent, its biggest gain since February 2009. If this reflects higher wages as a result of rising output, the effects on inflation would be relatively benign. However, if higher wages reflect emerging labour shortages, inflation could accelerate at a faster rate. Ironically, the prospect of higher interest rates will underpin the strength of sterling, and will only serve to crimp export growth even more.
Next week's economics...
Mortgage approvals for May are due for release on Monday, and it will be interesting to see whether the relatively subdued lending in April is improved upon in the wake of the general election. Buy-to-let lending is almost certain to show a further increase, but approvals for home movers and first-time buyers are still down from a year earlier. Part of this can be explained away by the tougher rules on mortgage lending, but there is also a restraining element generated by the fact that there has been a restricted supply of houses coming onto the market.
On Thursday, the purchasing managers' index (PMI) for June on manufacturing comes out, followed by construction on Friday. Manufacturing output is not expected to show any material improvement, and the picture on the construction side has been clouded by revisions to earlier data released by The Office for National Statistics. Initial data showing a 1.1 per cent contraction in the first quarter have been changed to show a decline of just 0.2 per cent. And in the fourth quarter of last year, the stated decline of 2.2 per cent has been revised to a gain of 0.2 per cent. However, initial indications point to a small decline at the start of the second quarter, with output in April falling by 0.8 per cent, well down from expectations of a modest rise. Even so, despite the fall in April the construction industry has still grown by nearly 1.5 per cent on an annual basis, and the PMI in May moved up from a 22-month low of 54.2 in April to 55.9. This may well signal an uptick in activity that could improve on the year-on-year increase recorded to the year in April, which was the weakest since November 2013.
