Bank of England officials hope the ratchet between higher prices and wages will soon moderate as official figures on Wednesday are set to show a large drop in the headline inflation rate.
The central bank is expecting the annual rate of consumer price inflation to drop almost 2 percentage points from 10.1 per cent in March to 8.4 per cent in April, and decline to its 2 per cent target in late 2024 or early 2025.
If the BoE’s expectations are met, prices would still rise quickly, but not as rapidly on an annual basis as they have over the past year.
Officials hope that the falling rate of inflation will persuade companies to think twice before increasing prices or agreeing generous wage settlements.
Andrew Bailey, BoE governor, said last week that the bank’s contacts with companies suggested “the decline in inflation and the looser labour market [will] begin to reduce pay awards in the second half of the year”.
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In the same speech, however, he noted, that officials fear a wage-price upward spiral might continue even as the headline rate of inflation declines. The greater the signs of these “second-round effects” persisting, the more the BoE would need to raise interest rates, he said.
Bailey’s comments came after BoE chief economist Huw Pill said the danger for the bank’s inflation fighting credibility was that people and companies kept on “trying to maintain their level of spending before the pie shrunk”.
Economists are expecting a large drop in the headline rate of inflation in this week’s data because the 54 per cent rise in the energy price cap for gas and electricity tariffs, imposed in April 2022, will drop out of the annual inflation calculation.
With the energy bill for a household with average consumption capped at £2,500, compared with £1,971 in April last year and £1,277 in March last year, energy price inflation will drop in the April figures to below 40 per cent compared with 90 per cent a year ago, according to the Resolution Foundation think-tank.
Ofgem, the energy regulator, will announce on Thursday the energy price cap for July to September, with Cornwall Insight, the consultancy, expecting the bill for the average consumer to fall to £2,054 for that quarter.
Although headline CPI inflation is set to fall sharply in the data to be published on Wednesday, economists expect measures of underlying price pressures to show little improvement.
Ben Nabarro, chief UK economist at Citigroup, forecast that the UK’s core CPI inflation rate, excluding food, alcohol, tobacco and energy prices would climb from a 6.2 per cent rate in March to 6.5 per cent in April.
Such a rise would underline BoE officials’ concerns about persistently high inflation, which have prompted the central bank to raise interest rates at the past 12 consecutive meetings of its Monetary Policy Committee.
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The path of core inflation is, however, uncertain and other economists, such as Bruna Skarica, UK economist at Morgan Stanley, expect it to edge down to 6.1 per cent in April.
Skarica also expects food price inflation to begin to moderate, following high-profile announcements from supermarkets on cuts in the price of milk. The annual rate of food price increases hit a 45-year high in March of 19.2 per cent.
Torsten Bell, chief executive of the Resolution Foundation, said that while energy’s role in driving high inflation was declining, “that of food very much has not”.
With poorer households allocating roughly 15 per cent of their budgets to food compared with 10 per cent for the richest households, inflation was more heavily skewed to the poor than at any time since equivalent records began in 2006.
“Everyone realises food prices are rising, but it’s less clear that the scale of the increase has been fully understood in Westminster . . . The cost of living crisis isn’t ending, it’s just entering a new phase,” Bell said.
Source: Economy - ft.com
