With update 21 November 2024
Return of Inflation in the UK
1. Introduction
The recent UK Budget has introduced policies likely to rekindle inflationary pressures, threatening the current downward trajectory of consumer price inflation (CPI).
Bank of England Governor Andrew Bailey warns that Budget measures could delay further rate cuts and stoke inflation.
2. Key Inflationary Drivers
a. Corporate Cost Pressures
Businesses, particularly in labour-intensive sectors, face higher costs due to:
National living wage increases.
Employer National Insurance Contribution (NIC) rate hikes.
Impact:
Companies like BT, Sainsbury’s, and JD Wetherspoon are expected to raise prices to offset increased payroll costs.
Suppliers may pass on cost increases, amplifying inflationary pressures.
b. Wage Growth
Wage growth remains strong at 4.8% in the private sector, well above the target of 2–3%.
Public sector pay increases further push average earnings upward, influencing private sector pay negotiations.
c. Public Spending
Increased government spending on hospitals, schools, and public services is deemed inflationary:
The Office for Budget Responsibility (OBR) predicts a 0.5% rise in CPI due to Budget policies.
3. Changes to Rate Cut Expectations
Pre-Budget forecasts of a 4% base rate by mid-2024 have been revised upward, with rates now expected to fall more gradually:
Analysts at Pantheon Macroeconomics foresee rate cuts occurring quarterly instead of at every meeting.
Berenberg estimates the terminal rate to be 4.25% by Q2 2024.
Capital Economics increased its 2026 CPI forecast from 2% to 2.2%.
4. Additional Pressures
External risks, such as US election outcomes and potential trade wars, could exacerbate inflationary pressures.
A weaker sterling may contribute to imported inflation, further complicating the Bank of England’s policy decisions.
5. Conclusion
The Budget’s fiscal policies, while aimed at boosting public spending and wages, risk reversing recent progress in controlling inflation.
Analysts and market observers caution that the Bank of England may slow down or halt rate cuts, prioritising inflation control over economic stimulus.
Update 21 November 2024
Yes, it's difficult to get a handle on what's going on. But basically, before the budget, the data said that inflation was on the way down, then along came the budget,
- up go employers' national insurance contributions and the minimum wage, and this will translate through into higher prices
- then wages are still on the rise and for a few very interesting reasons. Main one being the hangover from covid
- and the government is going to spend more on infrastructure, so it says.
And the consequences are to push inflation up. But over the next year or so, the Bank of England should get it back down, so that by 2026, it will be near 4.5%.
But take a careful look at that graph. The forecasts made in March and then there's the new forecast made after the budget.
What do you read for 2026?
Of course, economists are always wrong and no one is worse than the Bank of England...
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