For the first time since May, the Bank of England has inched a little closer to its 2 per cent inflation target. Figures released by the Office for National Statistics this morning show that last month the Consumer Price Index fell to 3.6 per cent from 3.8 per cent in September.
Unfortunately for the government, the slight improvement offers limited relief ahead of the upcoming Budget next Wednesday. October marks the 13th consecutive month above the target. Food and drink inflation, a primary issue to the majority of voters, increased to 4.9 per cent from 4.5 per cent in September. To make matters worse, transport costs, another expense felt keenly by households, are rising rapidly and show minimal signs of recovery. Yesterday, petrol prices reached their highest level since March. Not only are shoppers paying more at the checkout, they are spending more to get there.
There is some good news though. Core inflation, which removes more volatile items such as food and energy, continues its gradual decline. This is consistent with the Bank of England’s judgement that inflation is past its peak. The real test will be whether its further prediction, a return to the 2 per cent target by mid-2027, materialises.
This leaves Rachel Reeves with a bit of a headache. Alongside inflation, Britain’s borrowing costs are the highest in the G7 and place serious constraints on the government’s ability to be more productive in its spending. Unless the Chancellor convinces markets that her fiscal plans are robust, it is unlikely that the situation will improve unless the Bank of England cuts interest rates. The group responsible for setting the Bank’s rate, the Monetary Policy Committee (MPC), will next meet on 18 December. If inflation does continue to fall it’s possible the MPC votes for a cut in time for Christmas – with concerns about a weakening labour market driving the decision.
All this leaves the Chancellor with a conundrum in next week’s Budget: how can she provide the stimulus the economy needs without simultaneously sending prices shooting up again? Yet the growth mission that dominated Labour’s rhetoric in their election campaign may have been put on the back-burner. The government is more concerned with the fiscal black hole that needs to be plugged.
It appears, then, that the Budget will be defined by a smorgasbord of small, tax revenue raising changes that avoid breaking Labour’s manifesto pledge not to ‘increase national insurance, the basic, higher, or additional rates of income tax, or VAT’. Not only is this Budget unlikely to provide the lightning bolt the economy needs, niche sector by sector tax targeting risks pushing prices up once more. How the Chancellor navigates that, or whether she even can, will be what to look out for when the Budget is unveiled next Wednesday.
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