London Daily

Focus on the big picture.
Thursday, Jul 31, 2025

Inflation: Why the Bank of England is set to raise rates when it can't influence many rising costs

Inflation: Why the Bank of England is set to raise rates when it can't influence many rising costs

The number might have surprised most economists, who were anticipating a figure slightly below 4% rather than slightly above it, but in another sense there's nothing enormously surprising about today's inflation figure, striking as it may be.

Everyone expected CPI to rise sharply in October, as we saw the impact of higher energy prices on the typical shopping basket of goods which constitutes the Consumer Price Index (CPI).

We've known for many months that raw material prices have been on the rise, and that the potential for higher prices has been strong. Even so: it's worth reflecting on the root causes for the highest rise in prices in a decade.

There are some obvious short-term explanations, from the domestic - the end of the COVID-era VAT cut for the hospitality sector, the rise in the home energy price cap - to the international.

An easing in VAT support for hospitality contributed to rising inflation in October


Most obviously, the world economy is whirring back into action in the wake of COVID-19 shutdowns. The rebounds are even bigger in countries like the United States, where President Biden is splurging trillions of dollars on new investment and household support packages.

The economic system is not especially used to annual growth rates of 6% or above, which is what we're looking at in many developed economies this year. With so much demand for goods, there is little surprise that prices are on the rise. And in one sense this kind of inflation represents good news, since it reflects positive economic news.

The issue, however, is that often inflation is not a good news story.

Sometimes rising prices do not come hand in hand with rising growth. Sometimes prices rise so high that they stifle demand, deterring people from spending and even sparking a recession. The big question occupying economists is whether, once the "COVID effect" has been and gone, this inflation is of the "good" or "bad" variety.

It's probably too early to say for sure which one we're looking at, though the fact that the Office for Budget Responsibility expects UK households to face another lean five years for real wages is not especially encouraging.

The fear in the Bank of England, however, is that this inflation becomes "sticky" in the coming months, with employees using price rises to justify pay increases, which in turn fuels an inflationary spiral with prices chasing wages ever higher.

That would make few people better off.

The Bank has already signalled that it's likely to raise interest rates soon.

Whether that means next month's meeting or the following one in February has been a matter for debate, but today's inflation figures, alongside the strong labour market data yesterday, mean next month is looking increasingly likely.

However, speaking to me earlier this month the governor, Andrew Bailey, said there was only so much he and his colleagues at the Monetary Policy Committee can do to temper the prices we're seeing right now.

Life, in short, is getting more expensive. And pretty soon borrowing will be too.

Newsletter

Related Articles

0:00
0:00
Close
Former Judge Charged After Drunk Driving Crash Kills Comedian in Brazil
Jeff Bezos hasn’t paid a dollar in taxes for decades. He makes billions and pays $0 in taxes, LEGALLY
China Increases Use of Exit Bans Amid Rising U.S. Tensions
IMF Upgrades Global Growth Forecast as Weaker Dollar Supports Outlook
Procter & Gamble to Raise U.S. Prices to Offset One‑Billion‑Dollar Tariff Cost
House Republicans Move to Defund OECD Over Global Tax Dispute
Botswana Seeks Controlling Stake in De Beers as Anglo American Prepares Exit
Trump Administration Proposes Repeal of Obama‑Era Endangerment Finding, Dismantling Regulatory Basis for CO₂ Emissions Limits
France Opens Criminal Investigation into X Over Algorithm Manipulation Allegations
A family has been arrested in the UK for displaying the British flag
Mel Gibson refuses to work with Robert De Niro, saying, "Keep that woke clown away from me."
Trump Steamrolls EU in Landmark Trade Win: US–EU Trade Deal Imposes 15% Tariff on European Imports
ChatGPT CEO Sam Altman says people share personal info with ChatGPT but don’t know chats can be used as court evidence in legal cases.
The British propaganda channel BBC News lies again.
Deputy attorney general's second day of meeting with Ghislaine Maxwell has concluded
Controversial March in Switzerland Features Men Dressed in Nazi Uniforms
Politics is a good business: Barack Obama’s Reported Net Worth Growth, 1990–2025
Thai Civilian Death Toll Rises to 12 in Cambodian Cross-Border Attacks
TSUNAMI: Trump Just Crossed the Rubicon—And There’s No Turning Back
Over 120 Criminal Cases Dismissed in Boston Amid Public Defender Shortage
UN's Top Court Declares Environmental Protection a Legal Obligation Under International Law
"Crazy Thing": OpenAI's Sam Altman Warns Of AI Voice Fraud Crisis In Banking
The Podcaster Who Accidentally Revealed He Earns Over $10 Million a Year
Trump Announces $550 Billion Japanese Investment and New Trade Agreements with Indonesia and the Philippines
US Treasury Secretary Calls for Institutional Review of Federal Reserve Amid AI‑Driven Growth Expectations
UK Government Considers Dropping Demand for Apple Encryption Backdoor
Severe Flooding in South Korea Claims Lives Amid Ongoing Rescue Operations
Japanese Man Discovers Family Connection Through DNA Testing After Decades of Separation
Russia Signals Openness to Ukraine Peace Talks Amid Escalating Drone Warfare
Switzerland Implements Ban on Mammography Screening
Japanese Prime Minister Vows to Stay After Coalition Loses Upper House Majority
Pogacar Extends Dominance with Stage Fifteen Triumph at Tour de France
CEO Resigns Amid Controversy Over Relationship with HR Executive
Man Dies After Being Pulled Into MRI Machine Due to Metal Chain in New York Clinic
NVIDIA Achieves $4 Trillion Valuation Amid AI Demand
US Revokes Visas of Brazilian Corrupted Judges Amid Fake Bolsonaro Investigation
U.S. Congress Approves Rescissions Act Cutting Federal Funding for NPR and PBS
North Korea Restricts Foreign Tourist Access to New Seaside Resort
Brazil's Supreme Court Imposes Radical Restrictions on Former President Bolsonaro
Centrist Criticism of von der Leyen Resurfaces as she Survives EU Confidence Vote
Judge Criticizes DOJ Over Secrecy in Dropping Charges Against Gang Leader
Apple Closes $16.5 Billion Tax Dispute With Ireland
Von der Leyen Faces Setback Over €2 Trillion EU Budget Proposal
UK and Germany Collaborate on Global Military Equipment Sales
Trump Plans Over 10% Tariffs on African and Caribbean Nations
Flying Taxi CEO Reclaims Billionaire Status After Stock Surge
Epstein Files Deepen Republican Party Divide
Zuckerberg Faces $8 Billion Privacy Lawsuit From Meta Shareholders
FIFA Pressured to Rethink World Cup Calendar Due to Climate Change
SpaceX Nears $400 Billion Valuation With New Share Sale
×