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Saturday, May 31, 2025

Explainer: UK inflation nears 30-year high, but how fast will it fall back?

Explainer: UK inflation nears 30-year high, but how fast will it fall back?

British consumer price inflation looks set to hit a 30-year high of 6% or more in April, but the big question for the Bank of England and the wider public is how quickly it will then fall back.

The BoE last month became the world's first major central bank to raise interest rates since the coronavirus pandemic hammered the global economy.

Now investors are betting on as many as four more rate hikes in 2022, taking Bank Rate as high as 1.25%, because the rise in prices in Britain - as in many other rich economies - looks set to be less transitory than previously hoped.

The inflation peak will hit the spending power of consumers just as they face a tax hike in April, challenging Britain's economic recovery from its coronavirus crash of 2020.

Bethany Beckett, an economist with Capital Economics, said household disposable income will fall in real terms this year, contributing to a slowdown in economic growth to 3.7% in 2022. The BoE in November predicted 5.0% growth this year.

HOW LONG IS INFLATION LIKELY TO STAY HIGH?


The BoE's current forecasts, published in November, point to consumer price inflation of 3.5% in 2022 before a fall to 2.25% in 2023, close to the BoE's 2% target.

Then, after gas prices rose further, the central bank said in December it had raised its estimate for the peak in inflation to about 6% in April.

That means the BoE is likely to push up its full-year inflation forecasts again on Feb. 3, alongside what many investors think will be another rise in Bank Rate to 0.5%.

Households face a sharp increase of about 50% in their gas bills - or a bit less if the government moves to lessen the hit - in April, when a regulated price cap is due to be increased.

Paul Dales, chief UK economist at consultancy Capital Economics, has almost doubled his inflation forecast for 2022 as a whole to 4.0% from a previous estimate of 2.2%.

WHAT IS GOING ON WITH GAS PRICES?


After their surge, gas prices have fallen recently.

Britain is set to receive a record number of liquefied natural gas cargoes this month, helping to bring the day-ahead natural gas price down from a peak of more than 450 pence a therm in late December down to about 200 pence last week, although that was still much higher than its level of about 50 pence a year ago.

Philip Shaw, an economist with bank Investec, said inflation in 2022 could end up at 2.5% if the recent fall in gas prices continues and leads to a cut in tariffs at a twice-yearly review by regulators due in October.

WHAT ELSE IS DRIVING UK INFLATION?


As well as the usual variables, from petrol prices to the impact of weather of food costs, another key factor for inflation this year is what happens to global supply chains, which were hit hard by the pandemic.

This has been seen most starkly in the car market, where a shortage of microchips has curtailed production of new cars, pushing the price of second-hand models up by 27%.

However, a survey of purchasing managers at British manufacturers last month showed an easing of prices paid for inputs from near record highs.

But analysts are watching for the impact of the Omicron variant in China where a strict approach to stamping out coronavirus outbreaks led to the shutdown of suppliers vital for global manufacturers in 2020, pushing up prices.

IS A WAGE-INFLATION SPIRAL LIKELY?


The BoE's main concern is not so much about what inflation does in the coming months but whether it triggers longer-term inflationary pressures, principally in wage settlements.

Some companies have responded to a post-Brexit, post-COVID shortage of workers by pushing up pay for some roles.

Food retailer Gregg's (GRG.L) this month brought forward a pay rise for its staff.

A survey of manufacturers showed recent pay increases ranged between 2% and 3% but went as high as 14% in some cases, while 45% of firms had yet to agree a pay deal as they awaited more clarity on inflation and other factors.

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