FROM our earliest days in the kindergarten as cub economics reporters, one thing is drummed into us. Don’t get carried away with one month’s figures. One swallow doesn’t make a summer.

It is usually pretty good advice. Official statisticians are skilled at making fools of us all. All too often, something that appears one month to mark the beginning of a cast-iron trend will have reversed itself the following month.

That is the spirit, perhaps, in which we should treat one of the most surprising sets of figures for a while; last week’s inflation numbers. Before they came out analysts saw little prospect for much improvement.

Some were suggesting there would be no return to target this year because of high oil prices and the rising cost of food. Even the Bank of England was uncertain, its latest inflation report this month warning of a “higher profile” for inflation in the near term.

The last time inflation was below target, after all, was as long ago as March last year. Fifteen months of inflation at or above (mainly above) target was hard to take for the Bank and provoked accusations that it had lost control.

Everything was good about last week’s figures. Not only did consumer-price inflation drop from 2.4% to a below-target 1.9% but retail-price inflation fell from 4.4% to 3.8%. RPIX inflation – excluding mortgage-interest payments – dropped from 3.3% to 2.7%. Goods-price inflation fell, from 1.4% to 0.5%; service-sector inflation from 3.7% to 3.5%. Core inflation fell from 2% to 1.7%.

Two things were particularly gratifying. One was that the “DFS effect”, highlighted here, worked as predicted. Furniture stores such as DFS pushed up their prices sharply in June – ahead of the summer sales – only to cut them even more sharply last month.

The other was that there are now serious doubts about the Bank’s big worry; the return of pricing power. Given the power of the supermarkets, their influence on inflation is enormous.

Part of the rise in inflation we have seen over the past year was because the supermarkets stopped competing aggressively on price. They have started doing so again in a big way, on everything from £5 copies of the latest Harry Potter to product-by-product price comparisons on billboards.

The inflation figures reminded us we are still in a low-inflation era in the UK. They reinforced the argument that we might have seen an energy-related inflation blip. They were a riposte to all that harrumphing about the Bank falling down on the job.

But, as I learnt all those years ago, one swallow doesn’t make a summer. Indeed, one worry about the figures was they were almost too good. Will last month’s sharp fall to a below-target 1.9% be followed by a couple of months above the target? The euphoria that greeted last week’s numbers would soon be extinguished and talk of higher rates reignited. A statelier progress towards 2% might have been preferable.

Before dismissing the numbers, however, it is worth remembering that the Bank did, in my view, respond disproportionately to one month’s figures very recently. There is no doubt that when inflation rose to 3.1% in March (as reported in April) and Mervyn King was forced to pen his open letter to the chancellor, a new steeliness began to affect the monetary policy committee (MPC) as criticisms rained down on it from the outside. The only criticism from here, incidentally, was that they were in danger of panicking themselves into a crisis.

After inflation moved into letter-writing range, the MPC’s decision to hike from 5.25% to 5.5% in May was unanimous. Four of its members, including Mervyn King, came back for another hike in June. Having failed then, the governor and his more hawkish colleagues succeeded in getting a rate hike through last month.

Not only that but there are quite a few other swallows around. Pay growth is so subdued as to be almost surreal. Including bonuses, average earnings grew by just 3.3% in the 12 months to June, down from 4.6% as recently as February. Industry’s raw-material and fuel costs last month were up a mere 0.1% on a year earlier, and this was before oil prices dropped back from their recent highs.

Even the MPC’s minutes struck a more dovish tone than expected after its inflation report a week earlier. The committee voted 9-0 for no change in rates and, according to the minutes, “most members emphasised they had no firm view on whether rates would need to rise further”. Armed with this, my conclusion would have been that the case for higher interest rates was so gossamer thin as to be nonexistent.

And that was without something I have not so far mentioned, the turbulence in markets. To be fair to the MPC, they appear to have devoted a lot of attention to “substantial volatility in financial and credit markets”.

There is a precedent here, for those prepared to delve a little into history. In August 1998, the Bank warned in its quarterly report that the inflation risks were on the upside. Two months later it cut interest rates by a quarter of a point, the first in a series, in response to the financial-market crisis – Long Term Capital Management and all that – then raging. The MPC’s vote for a cut was 7-2, by the way, with the two wanting a full half-point reduction.

In the nature of these things, markets that were recently looking for rate hikes will soon be looking for cuts. My strong sense is that this is not a road the Bank and other central banks, including the Fed, want to go down. One reason they have been keen to provide liquidity, or stand ready to do so, is that they see it as a problem that requires a market response, not a monetary-policy response. Hence the Fed cut only its discount rate on Friday. It becomes a monetary-policy problem only if it starts seriously to hit economic growth.

One swallow doesn’t make a summer. But there are quite a few circling overhead just now. Does this mean we can now firmly rule out a hike in Bank rate to 6%? No. Does it make such a move unlikely? Yes. As for cuts, let’s see how the market crisis pans out.

PS Two weeks ago I offered a chance to beat the Treasury mandarins. The exercise came from Michael Blastland and Andrew Dilnot’s new book The Tiger That Isn’t (Profile Books), and the only assistance was to say the correct answers might lie outside the range given.

Here are the questions: Q1. What share of income tax is paid by the top 1% of earners? a) 5%; b) 8%; c) 11%; d) 14%; e) 17%. Q2. What posttax joint income would a childless couple need to be in the top 10% of earners? a) £35,000; b) £50,000; c) £65,000; d) £80,000; e) £100,000. Q3. How much bigger is the UK economy (inflation-adjusted national income) than in 1948? a) 50%; b)100%; c) 150%; d) 200%; e) 250%. For Q1, a mere 19% of officials answered e), 17%, the closest to the correct answer of 21. I knew that. But Q2, I have to say, surprised me, I would have gone for £50,000 but the right answer is £35,000. Only 10% of officials got it right; 48% agreed with me, but 21% thought £65,000, 19% £80,000 and 3% £100,000. Let’s hope they are not in charge of tax policy.

The third was an easy one. Roughly speaking, the economy doubles in size in real terms every 25 years, so the correct answer was about 300%, and 250% merited a mark. But only 3% of officials knew that; 10% said the economy was only 50% bigger; 25% went for 100%; 42% chose 150% and 17% thought 200%.

So who outsmarted the mandarins? The field for this quiz was a bit smaller than those I’ve done on noneconomic matters, which could be the August effect or could tell you where the interest of readers really lies. But Rohan Da Silva was a clear winner, getting all three right. Geoff Hope-Terry was one of a number who got two out of three – like me he went for £50,000 for the second question. I liked his tie-breaker: Treasury officials are called mandarins because they speak a different language to the rest of us. They both win copies of the book.

david.smith@sunday-times.co.uk

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