THE RETURN OF UK INFLATION

20 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.