Inflation, which eased for the second month in a row, may be nearing its peak as analysts warn of rising household bills and utility costs that could push inflation over 3% by May.
Inflation: Will It Stop Rising?
The rate of rising prices, or inflation, has eased for the second month in a row, according to official figures. Prices rose at an annual rate of 2.6% in March, far slower than the 11% inflation peak seen in 2022. While this data is for last month, analysts warn that it may be the calm before a storm.
Inflation is a sustained increase in the general price level of goods and services in an economy over time.
It's measured as an annual percentage increase in the Consumer Price Index (CPI).
Common causes of inflation include monetary policy, supply and demand imbalances, and external factors like global events or natural disasters.
Effects of inflation can be far-reaching, reducing purchasing power, increasing debt burdens, and affecting economic growth.
Moderate inflation is often considered necessary for a healthy economy, but high inflation rates can lead to recession and financial instability.
Key Factors Driving Future Inflation
There are three key areas where inflation is expected to rise. A host of household bills went up at the start of April, on top of continued rent rises. Utilities such as domestic energy and water, council tax, phone and broadband contracts, and TV licence all saw significant increases. These increased costs will feed into the next set of inflation data published in May, which is expected to see the inflation rate quickly climb over 3%. This would be a concern for policymakers, who are already under pressure to boost growth.
Tariff Policy and Its Impact on Inflation
The US tariff policy has been a dominant force in recent weeks. President Trump announced taxes on goods imported into the US from around the world, then rowed back or delayed many, but doubled down on Chinese imports. This has led to retaliation from other countries and uncertainty over the impact on inflation.
In theory, higher tariffs should make goods more expensive for consumers, but the situation is more nuanced in the UK. The 10% tariff on UK goods imported by the US is lower than feared, and retaliation looks unlikely. Instead, there are heightened expectations of a UK-US trade deal, which could limit price rises. However, if China faces massive tariffs on its goods bound for the US, it may find other places to sell its products, increasing price competition and slowing inflation.
Economic Growth and Inflation
Growth in the UK economy has been sluggish, but recent data was more positive than expected. However, there are warnings that this improvement could be short-lived, with some predicting a recession. This would not be good news for the government, which has made economic growth its priority. Additionally, workers’ job security becomes less stable if businesses cut costs, leading to reduced consumer spending and lower inflation.
Economic growth refers to an increase in a country's production of goods and services over time.
It is measured as the percentage change in Gross Domestic Product (GDP) from one quarter or year to another.
Economic growth is essential for improving living standards, creating jobs, and reducing poverty.
A higher GDP indicates increased economic activity, investment, and consumption.
Factors contributing to economic growth include technological advancements, trade policies, education levels, and government investments.
The Bank of England’s Delicate Balance
The Bank of England faces a delicate balancing act in boosting growth while keeping inflation under control. Cutting interest rates could add to consumer demand but also risks raising prices further from the 2% target. The rate-setters will need to navigate this tightrope carefully, particularly at their next meeting in May.
- bbc.com | When Will Inflation Stop Rising?
