Changing government plans to restrict energy prices will determine where inflation is headed in the future.
FREMONT, CA: Even though changes in government policy have clouded the medium-term prognosis for prices, the annual inflation rate in the U.K. returned to double digits in September, solidifying predictions of another increase in the Bank of England's benchmark interest rate early next month.
The rapid increase in global energy prices following Russia's invasion of Ukraine has caused the U.K.'s inflation rate to reach four-decade highs, forcing the BOE to boost its benchmark interest rate more than it had anticipated before the conflict.
Consumer prices were 10.1 per cent higher than they were a year ago, according to the Office for National Statistics, which is a greater rate of inflation than the 9.9 per cent reported in August and back to July's level, which was the highest in 40 years. It was an inflation rate that was greater than the 8.2 per cent reported in the United States for the year ending in September, but lower than the 10.9 per cent rate registered in Germany for the same time frame.
When the BOE's Monetary Policy Committee released its next decision on November 3, it signalled to increase its benchmark interest rate for the eighth time in as many meetings as possible. Samuel Tombs, an analyst from Pantheon Macroeconomics, says, “September's consumer prices figures sustain the pressure on the MPC to boost bank rate substantially at its next meeting, notwithstanding the approaching recession. The MPC still has a long way to go before it can declare victory.”
Three months before the Federal Reserve started to raise its benchmark rate, the U.K.'s central bank hiked its key rate for the first time in December 2021. The BOE's key rate is 2.25 per cent, while the Fed's key rate has increased faster and is now between three per cent and 3.25 per cent.
The outlook for UK inflation and interest rates has been muddled recently by policy reversals by the government. On September 23, the government revealed a package of tax cuts that, according to the BOE, are likely to result in more inflation than previously anticipated and a larger increase in its benchmark interest rate.
BOE Governor Andrew Bailey stated, “As things stand today, his best opinion is that inflationary pressures will require a bigger response than they probably imagined in August.”
The administration decided to roll back most of the tax cuts, reduce the two-year cap on energy prices for all households to six months, and promise additional tax increases and spending reductions. The energy price cap implies that inflation is expected to increase modestly during the upcoming months, peaking at 11 per cent before the end of this year, according to the central bank. However, many households can now view significantly higher energy costs for the majority of the upcoming year, which would tend to keep inflation high for longer. However, tax increases and spending reductions are anticipated to have the reverse effect on inflation after 2023.
Abbas Khan, an economist at Barclays, stated, “Support for household energy bills will become targeted from next April, which would likely mean greater inflation in 2023, but lower inflation in the medium run.”
