On the shop floor at least, the inflation crisis is pretty much over.
“There’s nothing I can see in the outlook for wage inflation or energy inflation or cost of goods inflation that would suggest that interest rates need to go up more,” says Lord Wolfson, chief executive of retailer Next.
While he is ready to admit “our window to the economy is small,” Lord Wolfson says: “We think inflation will ease dramatically.”
The Bank of England appears to agree.
A few hours after Lord Wolfson spoke, the Monetary Policy Committee (MPC), led by Andrew Bailey, voted to hold Britain’s interest rates unchanged.
Five of its nine members backed leaving the base rate at 5.25pc. Four called for an increase to 5.5pc.
While the MPC is clearly divided, the first pause in interest rate rises in two years has raised the prospect that borrowing costs may have peaked.
“There have been increasing signs that the restrictive stance of monetary policy is working to bring inflation down,” Bailey wrote in his letter to Jeremy Hunt, the Chancellor. “This is good news.”
However, the Governor was keen to stress that Thursday’s inaction was not a declaration of victory in the battle against inflation, even if things are moving in the right direction.
“There is absolutely no room for complacency,” he told the Chancellor.
The minutes of the MPC’s meeting note that “further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures.”
The strength of the vote in favour of another rate rise – four members, including one deputy governor – indicate this was a very close call.
Those who supported another rise to 5.5pc fear that the threat of long-term price rises has not gone away. They believe that another rate rise “was necessary to address the risks of more deeply embedded inflation persistence,” the minutes show.
However, the argument in favour of holding rates unchanged ultimately won out. A key factor was inflation data earlier this week.
Inflation unexpectedly slowed last month from 6.8pc to 6.7pc, despite a rise in petrol prices. Core inflation decelerated, as did services inflation – key signals that price rise pressure is losing momentum.
Falling costs for manufacturers appear to be “feeding through to consumer goods prices more quickly than had been anticipated previously,” the MPC said.
These surprise drops appear to have been enough to tip the balance.
The inflation figures were the latest in a series of data points suggesting that the economy is now beginning to fully feel the effect of repeated interest rate rises.
July’s fall in GDP suggests interest rates are now hitting demand, painfully but as required to have an effect on inflation.
Policymakers also relied on data beyond the official figures from the Office for National Statistics.
The Bank conducts its own research with businesses across the country. The MPC also had early access to the purchasing managers’ index (PMI), an influential business survey from S&P Global that will be published on Friday.
The combined picture showed services companies are facing less cost pressure, giving some extra confidence that inflation is ebbing.
Yet the hawks on the committee are concerned about pay.
The latest ONS figures show wages rising at the fastest pace on record, aside from those months in the pandemic when furlough distorted the data.
That stokes fears of a wage-price spiral, as companies put up prices to cover the extra costs and workers add to demand in the economy by spending their additional earnings.
The four MPC members who voted for another rate rise specifically called out wage growth as an area of concern. High pay growth, along with signs of resilient consumer confidence, adds to “evidence of more persistent inflationary pressures,” they fear.
Ultimately, Bailey and his allies managed to dispel these concerns. They pointed out that the record wage growth was “difficult to reconcile with other pay indicators,” including surveys of regional businesses and HMRC payroll data.
This suggests the Bank is increasingly confident that pay growth has peaked.
If they are right, when will the MPC be able to cut rates again?
Policymakers played down the prospect of lower borrowing costs anytime soon.
“Monetary policy will need to be sufficiently restrictive for sufficiently long to return inflation to the 2pc target sustainably in the medium term,” the MPC said.
Chief economist Huw Pill has previously used the metaphor of “Table Mountain” when talking about the future path of rates, suggesting a long plateau at 5.25pc.
Financial markets seem to agree: traders think there is a chance of one final rate rise around the turn of the year and no cut for at least 12 months.
Economists, however, think the Bank will have to trim back borrowing costs before then as growth struggles in the face of rates not seen for 15 years.
Kallum Pickering at Berenberg Bank predicts borrowing costs will begin to fall next spring, with rates falling to 4pc by the end of 2024.
“Markets are likely to lower their bets for the path of Bank Rate early next year as economic weakness and a further fall in the pace of inflation forces the Bank to turn less hawkish and begin to lay the ground for rate cuts probably from spring onwards,” he says.
Paul Dales at Capital Economics does not think the Bank will be able to move that quickly, as inflation will linger.
“We expect core inflation to fall only slowly, we think the Bank will keep rates at their peak until late in 2024,” he says.
But once the time comes, he predicts rates will drop relatively rapidly, falling to 3pc by the end of 2025.
Perhaps the best way to judge when and how fast rates will fall is to listen to the view from Britain’s shop floors. If Lord Wolfson is right, there is hope we are at the peak.