The oil price crash earlier this year has been the dominant influence. Additionally, though, the price of most core items has hardly risen or, in some cases, actually fallen, reflecting weak demand.
Admittedly, in some sectors that continue to be affected by social distancing, such as airlines and hospitality, in coming months prices could be forced up, as businesses struggle to cover their costs. And oil prices are rising. Even so, most businesses will keep prices broadly stable.
Accordingly, both the headline and core rates of inflation should continue to fall over the next few months. From September onwards I expect inflation to rise again, but it should remain well below the Bank’s target rate of 2pc for the next two years or so.
The controversial issue, however, concerns what happens after that. The growth of the money supply has recently taken off. Over the last year, the broadest measure, M4, which covers all bank deposits, is up by 9pc. I expect the growth rate to rise further over coming months.
In practice, there is no need to start ringing the inflationary alarm bells just yet. We have seen such rates of increase before without suffering an inflationary upsurge. Whether one happens now depends upon several factors.
First, will the recent huge injections of government money, financed by money printing by the Bank of England, continue at recent rates?
Second, will the private sector recipients of this largesse willingly hold increased bank deposits, rather than spend them? Third, will the economy simply be able to grow its way into a position where it can absorb this excess money?
Fourth, will the banks be spurred by the presence of so many extra reserves on their balance sheets into increasing their lending? And, finally, will policy be tightened to stop inflation in its tracks?