The rate of inflation has come down, barely. This morning’s update from the Office for National Statistics shows inflation fell to 10.1 per cent on the year in March, down from 10.4 per cent in February. The rate remains in the double digits, where it has hovered since September 2022. Today’s update takes the rate back down only to where it was in January.
A trend has emerged with inflation data in the UK. As predicted across the board, energy prices are falling at significant pace, with the largest ‘downward contributions’ in March coming from a drop in motor fuel prices – which fell by 5.9 per cent in the year to March 2023, compared with a rise of 4.6 per cent in February. But these price drops are being offset by a rise in domestic costs. Food costs spiralled once again – this time at the fastest rate in 45 years – up 19.1 per cent on the year in March, from 18 per cent in February.
This means the headline rate is barely moving: either coming down at a snail’s pace or inching back up. Both the Bank of England and the Office for Budget Responsibility thought the Consumer Price Index (CPI) would be under 9 per cent by March – and falling rapidly. Instead, other domestic costs have kept CPI above 10 per cent.
The headline rate is barely moving
Another concern is that core inflation – which excludes energy, food, alcohol and tobacco – refuses to budge, sticking at 6.2 per cent on the year. This is more than three times the Bank’s target of 2 per cent and adds to worries that some of these price hikes are getting baked into the system. While some sectors within domestic services did see a fall in the rate (hotels and restaurants dropped from 12.1 per cent on the year in February to 11.3 per cent in March), the rate of inflation for ‘all services’ has also remained the same as last month – at 6.6 per cent on the year.
Today’s figures will cause fresh headaches for both the Bank and the government. While yesterday’s labour market update may have quelled the Bank’s fears of a potential wage spiral (which saw one of the largest falls in real term wages since its records began), today’s update tells us that the rate of inflation is not coming down nearly as fast as the Bank would like – or had expected. This puts more pressure on the Bank to go for another interest rate hike next month – making a 0.25 per cent increase more likely. Capital Economics now says that the ‘risk’ of May ‘not being the last hike is growing.’
For No. 10, the most obvious difficulty is that the government has made ‘halving inflation’ one of its top five pledges for the year; and while there is still plenty of time for the rate of inflation to fall, it is becoming increasingly obvious that this kind of promise was never in the gift of government to make. Politicians don’t determine the rate of inflation, nor do they have the tools (i.e. control over interest rates) to bring the rate down. That sits firmly with the Bank of England, who have been notoriously slow to move over the past few years.
And while the government is at the mercy of external factors to meet one of its major pledges, it also has to answer to the many public sector unions demanding pay raises for their workers. The Treasury’s main position on public sector pay has been that inflation-based raises are not an option because the rate is going to come down so quickly this year. That reasoning has been put to the test with the first three updates of the year, which have all seen the rate stay above 10 per cent.
A fall closer to what the consensus was predicting – 9.8 per cent on the year – would have put the government in a slightly better negotiating position. Still, ministers are unlikely to budget from their year-long narrative – over which they do expect the rate of inflation to come down substantially. But today’s figures guarantee another tricky few weeks, which will coincide with the Royal College of Nursing balloting its members once again to authorise strike action for another six months.
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