“Headline CPI inflation fell slightly in July, which was in line with expectations, but it remains stubbornly high. Nevertheless, it would be wrong to overreact to these figures by raising interest rates or withdrawing the support provided by quantitative easing. While the Monetary Policy Committee cannot ignore the risk that inflationary expectations might worsen, there is no sign of this happening at present.
“With earnings growth remaining below inflation, these figures signal a further squeeze on disposable incomes. This will inevitably dampen demand and reinforce the pressures that will build up as a result of the Government’s deficit-reduction programme. If the MPC was to consider tightening monetary policy in these circumstances, risks of an economic setback would increase. Against this background, we urge the MPC to persevere with the current expansionary approach. The balance of probabilities still suggests that inflation will fall sharply over the next year.”