My chart for ICAEW this week shows that while headline inflation slowed to 2.3% in April, a core inflation figure of 3.9% means the fight against inflation is far from over.
We return to the topic of consumer price inflation (CPI) this week following the news that it has returned to within its target range of 2% plus or minus 1% for the first time since July 2021.
Our chart illustrates how a 16.7% fall in energy prices between April 2023 and April 2024, have partially offset core inflation of 3.9%, food price rises of 2.8% and alcohol and tobacco prices rises of 8.1%, to result in annual CPI of 2.3%.
It also shows how each of these components of inflation have changed over the last 12 months. Core inflation has slowed from an annual rate of 6.8% in April 2023 to 3.9% in April 2024, food price inflation from 19.3% to 2.8%, and alcohol and tobacco price inflation from 9.1% to 8.1%. Meanwhile, energy prices have fallen over the last year with the annual rate of change going from +10.8% in April 2023 to -16.7% in April 2024.
These components of the inflation index combine to see CPI slow from an annual rate of 8.7% in April 2023 to 2.3% for the 12 months to April 2024, positive news for the Bank of England. It has spent the last few years writing letters to the Chancellor, explaining why inflation is off target and the actions the Bank is taking to bring inflation back on target.
The challenge for the Bank of England’s Monetary Policy Committee is when to take the foot off the brake and start cutting interest rates. The indications are that this won’t be in June as some had hoped, with policymakers concerned about the persistence of services inflation (5.9% in the year to April 2024, a component of core inflation not shown in the chart) and the level of wage rises (5.7% in the year to March 2024), neither of which are consistent with inflation staying within its target range.
Our chart zooms across the Atlantic this week to take a look at Canada’s federal budget for 2024/25.
Canada’s budget 2024 sets out the financial plans of the government of Canada for the year from 1 April 2024 to 31 March 2025 (2024/25).
Like UK budgets, Canada’s budget 2024 is accompanied by financial projections for the four subsequent years to 2028/29. However, unlike the UK, Canada’s fiscal budget is prepared on an accruals basis, with a balance sheet including both financial and non-financial assets and liabilities, and a budgetary surplus or deficit that is equivalent to the accounting profit or loss in a private sector set of financial statements.
Canada’s approach contrasts with the statistics-based system of national accounts that most other countries use for setting fiscal targets, including the UK. This is despite the UK adopting International Financial Reporting Standards (IFRS) in its consolidated (Whole of Government Accounts), departmental and other public body financial statements, and an accruals-based resource accounting system derived from IFRS for internal budgeting and performance management.
Our chart this week shows how Canada’s federal budgetary balance is expected to be in deficit by C$40bn in both 2023/24 and 2024/25, before reducing over the rest of the forecast period to reach C$20bn in 2028/29, equivalent to 1.4%, 1.3% and 0.6% of GDP in 2023/24, 2024/25 and 2028/29 respectively. Or £24bn, £24bn and £12bn if converted at the 1 April 2024 exchange rate of C$1.70 to £1.00.
Budget 2024 assumes an average increase in nominal GDP of 4.0% a year between 2024 and 2028, reflecting a combination of economic growth of 1.8% on average and projected GDP inflation of 2.1%. Economic growth is expected to reflect a 0.9% annual increase in labour supply (1.6% from growth in the working-age population less 0.6% from lower labour force participation, 0.1% from higher unemployment, and 0.1% from fewer hours worked) and 0.9% from improved productivity.
Total revenue is forecast to grow by 7.1% from C$465bn (£274bn) in 2023/24 to C$498bn (£293bn) in 2024/25 before rising by an average of 4.2% a year to C$586bn (£345bn) in 2028/29. This is equivalent to 16.1%, 16.6% and 16.7% of GDP in 2023/24, 2024/25 and 2028/29 respectively.
Around two-thirds of revenue comes from federal income tax, amounting to a budgeted C$225bn in 2024/25. A further 15% comes from other taxes, with the C$76bn in 2024/25 comprising C$54bn from goods and services tax (GST, the Canadian version of VAT), C$6bn from customs import duties, C$13bn from excise taxes and other duties, and C$2bn from other federal taxes.
Other revenue is budgeted to amount to C$86bn in 2024/25 or 17% of total revenue, comprising C$30bn in employment insurance premiums, C$13bn from pollution pricing, C$9bn in revenues from Crown enterprises (net of Bank of Canada losses), C$3bn in foreign exchange revenues (principally returns on international reserves), and C$31bn in other income (including interest on tax receivables).
Total expenditure including net actuarial losses is expected to increase by 6.5% from C$505bn in 2023/24 to C$538bn (£316bn) in 2024/25 and then by an average of 3.0% a year to C$606bn (£356bn) in 2028/29. This is equivalent to 17.5%, 17.9% and 17.2% of GDP in 2023/24, 2024/25 and 2028/29 respectively.
Expenditure can be categorised between government programmes, welfare benefits, transfers to provinces, territories and municipalities, and interest and actuarial losses.
In 2024/25, spending on government programmes is budgeted to amount to C$225bn (C$123bn in operating expenses and C$102bn in transfer payments), while major transfers to persons are expected to be C$135bn (comprising C$80bn in elderly benefits, C$28bn in child benefit payments and C$27bn in employment insurance benefits).
Major transfers to provinces, territories and municipalities in 2024/25 of C$121bn comprise contributions of C$57bn for health care, C$25bn in equalisation payments to provinces, C$24bn for social programmes (social care, social assistance, post-secondary education, early years development, early learning and child care), C$5bn for territories, and C$2bn for community building, net of a C$7bn reduction in payments to Quebec (which acquired a greater share of taxes in the 1960s and 1970s), plus C$15bn in proceeds from pollution pricing returned to Canadians either directly or via provinces and territories.
Not shown in the chart is the projected balance sheet, with net liabilities expected to increase from an estimated C$1,216bn (£715bn) on 31 March 2024 to a budgeted C$1,255bn (£738bn) on 31 March 2025 and a projected C$1,372bn (£807bn) on 31 March 2029. The forecast balance sheet for 31 March 2025 comprises C$117bn (£69bn) in non-financial assets and financial assets of C$719bn (£423bn) less total liabilities of C$2,091bn (£1,230bn).
Net liabilities are expected to increase more slowly than the size of the economy, resulting in the ratio of net liabilities to GDP falling from 42.1% to 41.9% to 39.0% over the same period.
The budget document also reports on the Canadian government’s long-term financial projections, with federal net liabilities expected to reduce to 9.0% of GDP by 2055-56 despite a projected increase in the budgetary deficit back up to 1.1% of GDP. This partly reflects an assumption that net immigration will continue at 0.9% a year, offsetting the effects of more people living longer and a fertility rate of 1.5 births per woman.
Perhaps unsurprisingly, affordable housing is the first area of focus for Budget 2024, with the federal government aiming to increase the number of new homes by 3.87 million by 2031, a net 2 million on top of the 1.87 million already expected to be built.
My chart for ICAEW this week suggests that the public sector is less productive than it was, but difficulties in measuring productivity make it hard to say for sure.
According to the Office for National Statistics, public sector productivity has not recovered following the pandemic and is now lower than it was in 1997, despite technological advances since then.
My chart highlights how public sector productivity fell between 1997 and 2010 as spending and investment increased – a fall of 3.3% or 0.25% a year on average over 13 years – before climbing during the austerity years until 2019 – an improvement of 7.5% or 0.8% a year over nine years. The pandemic led to productivity collapsing as public services were severely disrupted before partially recovering, with productivity flat between 2022 and 2023 – overall a net drop of 6.3% or 1.6% a year on average over four years.
Overall, this means public sector productivity as measured by the ONS has fallen by 2.6% or 0.1% a year on average over the last 26 years. It is important to note that these changes do not cover all of the public sector – in some areas such as defence spending, productivity (value of outputs / cost of inputs) is assumed to be a constant 1, reflecting how difficult and subjective it would be to attempt to measure our military preparedness for war.
Despite that, the picture shown by this metric aligns with our more general understanding of what happened in these periods. The decline in productivity between 1997 and 2010 as the then Labour government improved pay and conditions for public sector employees makes sense, while the austerity policies of the Coalition and Conservative governments between 2010 and 2019 constrained the cost of delivering public services. And the pandemic resulted in many public services being closed or curtailed, and we know that many public services – particularly the NHS and schools – are still struggling to recover from the pandemic.
The chart provokes questions about how well this statistic values outputs given that while it is very easy to measure inputs, it is less easy to assess the value produced. For example, larger class sizes might give rise to an apparent productivity improvement as measured (more children taught for the same input of teaching time), but this may not capture any deterioration in quality that may result.
Not only is the quality of outputs difficult to measure in calculating productivity, but it also doesn’t measure outcomes, often much more important than outputs. In the health context this is whether the patient survives rather than how many operations were performed, for education it means how well-equipped our young people are for the world rather than how many hours they spent in a classroom, and for the criminal justice system how few crimes are committed rather than how many criminals are prosecuted.
Public sector productivity is an important metric, even if an imperfect one. It is helpful to understand how well public service activities are being delivered from a cost perspective – and how there is a need for improvement. But it doesn’t tell us whether those activities are improving our well-being, growing our economy, improving our environment, or building our resilience as a nation.
My chart for ICAEW this week looks at the price of cocoa, which has been popping as shifting weather patterns have caused harvests in Ghana and Côte d’Ivoire to collapse.
Developments in international commodity markets can often seem only distantly connected with everyday life, but for us chocolate lovers the quadrupling in the cocoa price since the beginning of last year is causing concern, not just about how much we will have to pay for our favourite sweet treat, but whether our next fix might be in jeopardy.
My chart this week skips over the just 65% increase in the one-month London cocoa futures price from £2,060 per metric ton at the end of 2022 to £3,399 at the end of October 2023 to focus on the last six months, during which the price has soared to record highs.
As the chart illustrates, the price had stabilised at around £3,400 to £3,600 per tonne between 30 October 2023 when the price was £3,399 per tonne, to 8 January 2024 when the price dipped to £3,381. The price has increased rapidly since then, up to £5,454 per tonne on 28 February, to £8,370 by 2 April before zigzagging up to a peak of £10,173 per tonne on 19 April. The price came down to £8,418 per tonne on 28 April 2024 (or just under £8.42 per kilogram) as buyers scaled back purchases in the light of lower spot prices, as well as concerns about the ability of suppliers to meet scheduled delivery commitments.
The rapid rise in prices has been driven by poor harvests in Ghana and Côte d’Ivoire, the two largest producers of cocoa as drier weather, hotter temperatures and shifts in rainfall patterns have all adversely impacted growing conditions. With poor harvests expected to continue and limited options for alternative supply in the near-term, global cocoa prices are unlikely to come back down any time soon.
This has of course fed into the cost of chocolate, with the UK media reporting that Easter eggs cost 50% more this year than in 2023, while our favourite chocolate treats are much more expensive than they were.
One consolation – at least for the Bank of England’s Monetary Policy Committee – is that chocolate constitutes less than 0.6% of the consumer price inflation index, meaning that even if chocolate inflation continues to accelerate, it shouldn’t stop the overall inflation level from coming back down to target in the coming months.
While the UK commits to increasing its defence and security expenditure, our chart this week looks at military spending around the world, which has reached $2.4trn.
Our chart this week is based on the latter, with SIPRI reporting that global military expenditure has increased to $2,443bn in 2023, a 6.8% increase after adjusting for currency movements. SIPRI’s numbers are based on publicly available information, which means that some countries may be spending even more on their militaries that are included in the database. SIPRI was unable to obtain numbers for military spending by Cuba, North Korea, Syria, Yemen, Turkmenistan, Uzbekistan, Somalia, Eritrea, Djibouti, and Laos.
Military spending is the news this week following the announcement by the UK government that it will commit to spending 2.5% of GDP on defence and security, the recent vote by the US Congress to provide $95bn in military aid to Ukraine ($61bn), Israel ($26bn) and Taiwan and others in the Indo-Pacific ($8bn), and the release of the Stockholm International Peace Research Institute (SIPRI) Military Expenditure Database for 2023.
More than half of that spending is incurred by NATO, with total military spending of $1,351bn, comprising $916bn by the US, $75bn by the UK and $360bn by other NATO members. Of the latter, $307bn was spent by the 23 members of the EU that are also members of NATO (including $67bn by Germany, $61bn by France, $36bn by Italy, $32bn by Poland and $24bn by Spain), while $53bn was spent by the other seven members (including $27bn by Canada and $16bn by Türkiye).
The Shanghai Cooperation Organisation (SCO) and the Collective Security Treaty Organisation (CSTO) are partially overlapping economic and military alliances convened by China and Russia respectively. China has the biggest military with $296bn spent in 2023, while Russia spent $109bn and other members spent $106bn (of which India spent $84bn).
We have categorised the rest of the world between other US allies which spent $304bn in 2023 (including $76bn by Saudi Arabia, $50bn by non-US members of the Rio Pact, $50bn by Japan, $48bn by South Korea, $32bn by Australia, $27bn by Israel and $17bn by Taiwan), Ukraine which spent $65bn, and $212bn spent by other countries for which SIPRI has data.
The numbers do not take account of the differences in purchasing power, particularly on salaries. That means China and India, for example, can employ many more soldiers, sailors and aircrew than NATO countries can for the same amount of money.
The Ukraine number also excludes $35bn in military spending funded by the US ($25bn) and other partners ($10bn) during 2023 that was not part of its national budget.
Global military spending is expected to increase further in 2024 as the international security situation deteriorates. This includes NATO members that plan to increase their defence and security spending to meet or exceed the 2% of GDP NATO minimum guideline set in 2014 to be achieved by 2024.
This includes the UK, which now plans to increase its spending on defence and security from 2.35% of GDP in 2023/24 to 2.5% of GDP by 2028/29, with suggestions from defence sources that setting a target of 3% of GDP may be necessary at some point in the next decade.
Our chart this week finds that the UK is ranking highly in the IMF’s latest five-year forecasts for general government net debt.
The International Money Fund (IMF) released its latest IMF Fiscal Monitor on 17 April 2024, highlighting how public debts and deficits are higher than before the pandemic and public debts are expected to remain high. The IMF says: “Amid mounting debt, now is the time to bring back sustainable public finances”, commenting that as prospects for a global economic soft landing have improved, it is time for action to bring government finances back under control.
Our chart this week illustrates how the UK is one of the ‘leading’ nations in government borrowing, with general government net debt projected by the IMF to reach 98% of GDP by 2029, compared with 92.5% in 2023. (Note: general government net debt is different to the public sector net debt measure used in the UK public finances – the latter includes the Bank of England and other public corporations.)
The chart illustrates how the major countries with the largest debt burdens tend to be advanced economies, with Spain (92% of GDP), the UK (98%), France (107%), US (108%), Italy (136%) and Japan (153%) having debt levels close to, or exceeding, the sizes of their economies.
Some countries are in much better fiscal positions, with Germany expected to bring its general government net debt down to 43% of GDP by 2029, while the Netherlands (43%), South Korea (29%), Australia (24%) and Canada (13%) also have relatively low levels of public debt compared with other advanced economies.
Emerging market ‘middle-income’ and ‘low-income’ developing countries often have much lower levels of public debt than advanced countries, often simply because it is more difficult for them to borrow to the same extent as well as not having the same scale of welfare provision as richer countries to finance. Examples include Kazakhstan (projected to have a general government debt of 8% of GDP in 2029), Saudi Arabia (22%), Iran (23%), Türkiye (30%) and Indonesia (37%). However, that does not stop some emerging and developing countries borrowing more, such as Nigeria (47%), Mexico (51%), Poland (55%), Egypt (56%), Pakistan (61%), Brazil (70%) and South Africa (84%).
Not shown in the chart are China and India for which no net debt numbers are available. The IMF projects them to have general government gross debt in 2029 of 110% and 78% of GDP respectively, indicating how their public debts have grown substantially in recent years. However, without knowing their levels of cash holdings it is less clear where they stand in the rankings.
Also not shown is Norway, the only country with negative general government net debt reported by the IMF. Norway’s general government net cash is projected to reach 139% of GDP in 2029, up from 99% in 2023.
As with all metrics, there are some issues in comparing the circumstances of individual countries. Many countries will also have investments, other public assets, or natural resource rights that are not netted off against debt, while many will also have other liabilities or financial commitments that aren’t counted within debt. For example, the UK has significant liabilities for unfunded public sector pensions as well as even larger financial commitments to the state pension, either of which, if included, would move the UK above the US in the rankings.
The IMF believes that as the world recovers from the pandemic and inflation is brought under control, it is important for countries to start tackling the deficits in the public finances and start bringing down the level of public debt.
This may be difficult for countries such as the UK where significant pressures on the public finances mean public debt is expected to increase over the medium term rather than fall.
Public spend as a share of the economy must fall over the next five years to make the sums add up – a big challenge for the next government.
My recently published in-depth Fiscal Insight into the Spring Budget 2024 highlights how the UK’s public finances are in a weak position, with difficult choices on spending deferred and post-election tax rises likely, irrespective of who wins the general election.
My chart for ICAEW this week illustrates how total public spending is forecast to fall by 3.6% as a share of national income between the first and final year of the fiscal forecast. This is equivalent to a 1.6 percentage point reduction in total managed expenditure from a budget of 44% of GDP in 2024/25 to a forecast of 42.4% of GDP in 2028/29.
At a reduction of 1.1% in 2025/26, 0.7% in 2026/27, 1.1% in 2027/28 and 0.7% in 2028/29, this may not sound that large – after all surely there must be some efficiencies that can be found in a budget of £1.2trn, or £1.4trn by 2028/29?
However, this doesn’t take account of the fact that around half of public spending goes on welfare, health and social care spending, where costs are principally driven by people living longer, the triple-lock state pension guarantee, and increasing levels of ill-health. And another 10% or so goes on interest, where costs are driven by no-longer-very-low interest rates on a growing level of debt.
Nor does it allow for the significant pressures facing many public services that are likely to need additional funding to address. This includes the deteriorating international security situation that has prompted recent calls for defence and security spending to increase from 2% to 3% of GDP, underperformance across a range of public services from the criminal justice system to potholes to HMRC service standards, local authorities that are struggling financially, and crumbling infrastructure (in some cases literally) – among many others. There is also little sign of the scale of investment that would be needed to transform the delivery of public services to achieve sustainable cost reductions while maintaining or improving service quality.
It is perhaps unsurprising that the government decided to postpone the three-year Spending Review scheduled for 2024 until after the general election, given how the Office for Budget Responsibility has highlighted how the 2021 Spending Review led to a departmental spending increase of £32bn a year, or around 1.2% of GDP. A similar revision to current spending plans would have more than absorbed the amounts used for tax cuts in the Autumn Statement 2023 and the Spring Budget 2024, or pushed up borrowing levels even higher than are currently planned.
If we are lucky, there will be more detail on each party’s tax and spending plans in their manifesto documents. Then again…
My chart for ICAEW this week looks at how liabilities in the UK’s public balance sheet have risen significantly over the five years to March 2022.
HM Treasury published the Whole of Government Accounts (WGA) 2021/22 on 26 March 2024, just under two years after the balance sheet date. This is a significant improvement from the 27 months it took to publish the 2020/21 edition, but is still a lot longer than the nine or 10 months HM Treasury is aiming for in the medium term, or the four months or less that it generally takes listed companies to publish their consolidated financial statements.
WGA are consolidated financial statements for more than 10,000 or so organisations in the UK public sector, including central government departments, devolved administrations, regional and local authorities, the Bank of England and other public corporations, government agencies, schools, hospitals, police and fire services, transport authorities and other public bodies. They are prepared in line with international generally accepted accounting practice – International Financial Reporting Standards – different to the statistical standards used by governments to report fiscal numbers in National Accounts.
My chart for ICAEW illustrates how the liability side of the balance sheet has grown over the five-year period, from £4.6trn on 31 March 2018 and 2019 to £5trn on 31 March 2020, £5.5trn on 31 March 2021 and £6.3trn on 31 March 2022.
This reflects how debt liabilities increased from £2.1trn to £2.9trn over that time, with huge sums borrowed in 2020/21 and 2021/22 during the coronavirus pandemic.
The other big liability in the balance sheet is the net pension obligation for public sector employees, which was £1.9trn on 31 March 2018 but had risen to £2.6trn by 31 March 2022, with falling discount rates a key factor in that rise. The latter comprises liabilities of £2.5trn for unfunded pension schemes and net liabilities of £0.1trn (£0.5trn liabilities less £0.4trn in assets) for local government and other funded pension schemes.
The balance sheet does not include the much larger commitment to pay the state pension, which as a welfare benefit is accounted for when incurred.
Total liabilities of £6.3trn on 31 March 2022 are equivalent to £93,000 per person in the UK, comprising £43,000 in financial liabilities, £11,000 in payables and provisions, and £39,000 in for public sector employee pensions.
Not shown in the chart is the asset side of the balance sheet, with assets of £2.4trn on 31 March 2022 or £36,000 per person, comprising fixed assets of £1.4trn (£20,500 per person), investments of £0.5trn (£7,000), receivables and other of £0.2trn (£3,500) and cash and other financial assets of £0.3trn (£5,000). This results in an overall net liability position of £3.9trn or £57,000 per person on 31 March 2022.
The good news is that HM Treasury is working hard to reduce the delays in producing the WGA, which means it shouldn’t be too long before we discover what is in the 31 March 2023 balance sheet. This is expected to show an improvement, as although the government has continued to borrow, pushing up financial liabilities, the net present value of pension obligations and provisions should fall significantly as discount rates have risen sharply since March 2022.
My chart for ICAEW this week looks at how retail sales have increased by 19.5% over the past five years, comprising a 1.4% fall in volumes and a 21.2% increase in prices.
The latest statistics from the Office for National Statistics (ONS) up to February 2024 highlight how retail sales in Great Britain (England, Wales and Scotland) have been on a rollercoaster ride over the past five years as the pandemic, then the cost-of-living crisis, battered the economy.
As our chart of the week illustrates, changes in retail sales can be split between volumes and prices, with growth in retail sales of 19.5% over the five years to February 2024 consisting of a 1.4% fall in volumes and a 21.2% increase in prices.
Our chart also shows how retail sales have increased by year, starting with a 0.8% increase in retail sales in the year to February 2020 (from a 0.2% fall in volumes and a 1% increase in prices) before the first pandemic lockdown the following month. That first year of the pandemic to February 2021 resulted in a 4.4% decline in sales (a 3.3% fall in volumes and a 1.1% reduction in prices) as we cut back on spending, followed by a massive 15.4% jump in retail sales in the year to February 2022 (7% from higher volumes and 7.8% from higher prices) as the nation emerged and started to spend heavily.
The cost-of-living crisis was behind a 5% increase in retail sales in the year to February 2023, as although prices rose 9.6% as inflation accelerated, households cut back on what they bought in response to drive a 4.2% fall in retail volumes.
Retail sales were up by a more modest 2.3% in the year to February 2024, comprising a 0.3% fall in volumes and a 2.6% increase in prices as inflation moderated.
Evening out the ups and downs gives an average increase in retail sales of 3.6% a year over the last five years, comprising an average fall of 0.3% a year in volumes and an average increase of 3.9% in prices.
This is not as positive a picture for retail business as the numbers might imply. Although it appears that retailers are selling slightly less overall at much higher prices, our chart doesn’t reflect the substantial increases many have seen in their input costs over the same period.
For more ICAEW analysis on the economy, click here.
The Bank of England Monetary Policy Committee held interest rates constant at its latest meeting, despite CPI falling to 3.4% in February and core inflation dropping to 4.5%.
The Office for National Statistics reported its latest estimates for inflation on Wednesday 20 March 2024, with both annual consumer price inflation (CPI) and annual consumer price inflation excluding food, alcohol, tobacco and energy (core inflation) in February falling by 0.6 percentage points to 3.4% and 4.5% respectively.
Our chart this week illustrates how CPI fell from 10.5% in the year to December 2022 to 4% in December 2023 and to 3.4% in February 2024, a rapid decline in the headline measure. This contrasts with the annual rate of core inflation, which increased from 6.4% in December 2022 to a peak of 7.1% in May 2023, before declining more gradually to 5.1% in December 2023 and to 4.5% in February 2024.
Annual food price inflation (5% in February 2024), alcohol and tobacco (11.9%), and energy prices (-13.8%) are of course many of the prices that we as consumers notice the most – what we buy in the supermarket, off-licence, at the fuel pump, or pay to heat and power our homes. However, food, alcohol, tobacco and energy prices are often very volatile and so core inflation allows us to understand what is happening to the (generally less volatile) prices of the other 78% of the things we buy as measured by the CPI Index.
The drop in core inflation to 4.5% is a positive sign for the Monetary Policy Committee, even if it didn’t reduce interest rates at its most recent meeting on Thursday 21 March 2024. The headline measure of CPI is coming down, and is expected to fall further over the next few months as large food price increases a year ago drop out of the annual comparison, a factor that won’t affect core inflation directly.
Policymakers are expected to remain cautious about cutting interest rates for several more months, as they will want to see how inflationary the scheduled increases in April of 9.8% in the minimum wage, 8.5% in the state pension and 6.7% in universal credit and other welfare benefits will be. Salaries are a significant input cost for the majority of businesses and it is likely that many will seek to pass on higher salary costs to their customers, while higher spending by pensioners and those in receipt of benefits could start to push up prices again just at the point that the Bank of England hopes to have brought inflation under control.
While there is likely to be much celebration and declaration of victory once the headline CPI measure drops into the target range over the next few months, how long it takes to bring down core inflation to within the target range is likely to be a better indicator of whether inflation has actually been tamed.
For more ICAEW analysis on the economy, click here.
