To tackle inflation, the Bank of England is keeping a close eye on the UK’s tight jobs market, ultra-high energy prices and the crippling cost of food.
These are the three main factors that have sent inflation rocketing over the last 18 months. The question is, has Britain reached a turning point and how quickly will inflation fall?
This week, official figures, to be announced on Wednesday, are expected to show the overall rate of inflation, excluding housing costs, falling to single figures for the first time in seven months. Forecasters expect April’s rate will have dropped by as much as two percentage points from the 10.1% reported in March, reflecting a sharp fall in energy prices and an easing of pressures in the labour market.
The consumer prices index (CPI) measure of inflation is forecast to fall further this year as 12 consecutive interest-rate rises by the central bank take their toll on the disposable incomes of households and businesses.
However, predictions made at the beginning of the year that inflation would slump to 3% by Christmas have been torn up in recent weeks after food continued to become more expensive.
In its most recent economic outlook, the Bank of England said inflation would remain stickier than its officials had estimated back in February, prompting an increase in the forecast for CPI from 3.25% in the last three months of the year to 5.1%.
In another blow to hopes of a sharp slide in inflation, the consultancy Oxford Economics said the easing of the labour market could prove to be shortlived.
In the most recent figures covering the three months to the end of April, job vacancies fell by 55,000 to just over 1m, the 10th consecutive quarterly drop. The number of people of working age not in the labour market and considered “inactive” rather than unemployed decreased by 0.4 percentage points to 21% in the three months to March from the previous quarter.
The consultancy’s chief UK economist, Andrew Goodwin, said much of the fall in inactivity was due to students working part time, which was not going to close the skills gap in sectors screaming for highly trained staff. And anyway, it was a trend that had most likely already run out of steam, he added.
Goodwin said the composition of those inactive was also changing, after April’s figures showed the number of people unable to work due to long-term sickness had reached a fresh record of 2.55 million.
Ministers seem to be underestimating the health shock to the UK workforce, which many experts believe is not going away any time soon.
Goodwin said the Office for National Statistics figures were questionable after a steep decline in the number of people and businesses responding to ONS surveys since the pandemic hit. “But if the data is accurate, it suggests that it might be hard to sustain the recent loosening in labour market conditions, particularly if demand for labour holds up,” he said.
Another factor preventing a steep inflation drop is the likelihood of energy prices remaining elevated for the rest of the year. About 27 million domestic energy customers are braced for the latest Ofgem price cap, to be announced on Thursday, which will set the price of energy bills from 1 July 2023.
Predictions are that Ofgem will cap average household energy bills at about £2,053 a year from 1 July, a reduction from the current average £2,500 under the government’s energy price guarantee.
However, analysts at Cornwall Insight said that rather than energy prices falling back to 2019 levels, future price caps will set average energy bills at £2,098 from 1 October and £2,163 from 1 January 2024, which will effectively halt the much-hoped-for slump in energy bills in its tracks.
The analysts said that while the price of gas had collapsed on world markets, long-term contracts signed by energy providers mean the savings will take time to filter through, leaving prices at double where they were before the pandemic struck.
According to the End Fuel Poverty Coalition, a campaign group, prices will be 62% above the level seen before the invasion of Ukraine.
Inflation may be coming down, but possibly not by much this year, and prices will still be high, especially for those on low incomes who spend more on energy and food as a proportion of their income.