Inflation is expected to climb even further, with forecasts indicating it will reach around 2.6 per cent when the latest figures are released on Wednesday. This marks an increase above the Bank of England’s target of 2 per cent, signalling a continued rise in costs.
Experts anticipate that the Consumer Prices Index (CPI) – a key measure of inflation – stood at 2.3 per cent in October. However, economists predict it will have increased to approximately 2.6 per cent in November.
Both services inflation and core inflation, which excludes volatile items like food and energy, are expected to show an upward trend. These increases reflect ongoing pressure on prices across various sectors of the economy.
The anticipated rise in inflation has significantly reduced the likelihood of a Bank of England base rate cut this Thursday. With inflation expected to climb further, experts now believe that the Bank’s Monetary Policy Committee (MPC) is set to keep the base rate at 4.75 per cent for the foreseeable future, likely holding it at this level until at least February next year.
Pantheon Macroeconomics provided insight into several key factors contributing to this rise in inflation. Among them were a hike in tobacco duties on October 30, which was part of the Budget, along with price increases in motor fuel and base effects from goods prices. These factors have driven inflation higher in November, leading to expectations of a further increase.
Pantheon forecasts that inflation will rise to 2.6 per cent, with particular concern over the rise in services inflation, which is expected to climb from 5 per cent to 5.1 per cent. Additionally, core inflation, which excludes volatile items like food and energy, is projected to rise from 3.3 per cent to 3.5 per cent. RSM UK also supports this view, expecting inflation to rebound to 2.6 per cent, further highlighting the growing pressures on the UK economy. This continued upward trend in inflation means that discussions around interest rate cuts are now largely off the table, with the Bank of England likely to stay on its current path until clearer signs of economic stabilisation emerge.
Economist Thomas Pugh from the audit and consulting firm has shared his forecast for inflation, predicting a steady climb to 2.6 per cent in the coming week. He believes this trend is likely to persist well into the first quarter of next year, with inflation potentially reaching around 3 per cent by early 2025. Pugh attributes this increase to several interconnected factors. A major driver is the surge in energy prices, which have been volatile and have had a significant impact on inflation. Furthermore, the recent budget included tax increases that are expected to contribute to the inflationary rise, particularly National Insurance contributions, VAT, and the national minimum wage, all of which put additional financial pressure on consumers. Additionally, Pugh points out that increased government spending could also fuel inflation, as demand for goods and services rises in response to this fiscal policy.
Raj Badiani, an economist at S&P Global, concurs with Pugh’s forecast, also expecting inflation to hit 2.6 per cent when the latest figures are released on Wednesday. According to Badiani, one of the primary factors behind this is the ongoing energy price base effects, which continue to impact the overall inflation figure. Furthermore, Badiani highlights the possibility of a further rise in food price inflation, an issue that has been particularly troubling for many households in recent months. The cost of food, alongside other goods, continues to rise, exacerbating the pressures on consumers’ budgets. Badiani also notes that the components of headline inflation are likely to remain divergent. While goods prices are showing some signs of stabilising, services inflation is expected to remain elevated, driven by factors such as higher labour costs and increasing demand for certain services. This divergence between goods and services inflation further complicates the overall inflationary picture and signals that consumers may continue to face rising costs for the foreseeable future.
Inflation is expected to moderate during 2025, though this forecast comes with some caveats. It assumes that there will be a limited retaliation from the UK in response to Trump’s tariff plan, and that the impact on imported inflation will be relatively moderate. However, experts have noted that inflationary risks have risen due to domestic factors, particularly the higher labour taxes that UK firms are facing. Additionally, the sharp rise in the national minimum wage, set to take effect in April 2025, could further contribute to upward price pressures. These factors could potentially exacerbate inflation, counteracting the general expectation of moderation.
The Bank of England’s latest Monetary Policy Report, released in November, indicated that the central bank expects inflation to hit 2.5 per cent by the end of 2024. This projection suggests that while inflation may ease slightly in the near term, it will remain above the Bank’s target of 2 per cent. The Office for Budget Responsibility (OBR), the government’s fiscal watchdog, also highlighted in October that the Chancellor’s Budget would likely contribute to inflationary pressures. Specifically, the OBR pointed out that some of the rise in employer National Insurance contributions would likely be passed on to consumers in the form of higher prices.
The implications of rising inflation are far-reaching. When inflation accelerates, prices are rising faster than usual, which could prompt the Bank of England to maintain higher interest rates for a longer period. The expectation of interest rates falling in 2025 has been a topic of discussion, but there is concern that if they fall more slowly than anticipated, it could have a knock-on effect on mortgage rates. This would likely result in households facing higher housing costs, making it more difficult for many to manage their finances.
As the Office for National Statistics (ONS) prepares to release the Consumer Price Index (CPI) figure on Wednesday at 7am, attention will be on how these factors combine to shape the current inflation landscape. With ongoing concerns about price pressures, the data released could provide important insights into how inflation is evolving and what it means for the broader economy.
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