The Bank of England is pinning its hopes on falling inflation, which will slow down wage growth
Bank of England officials are hopeful that the gap between higher prices and wages will narrow soon, as official data on Wednesday showed a significant drop in the headline inflation rate.
The central bank expects the annual rate of consumer price inflation to decrease by almost 2 percentage points from 10.1 percent in March to 8.4 percent in April, and then to the target value of 2 percent in late 2024 or early 2025.
If the BoE’s expectations are met, prices would continue to rise rapidly, but not as rapidly on an annual basis as last year.
Officials hope that falling inflation will make companies think twice before raising prices or making generous wage deals.
Andrew Bailey, Governor of the BoE, he said last week that the bank’s relations with companies “indicated a decrease in inflation and a looser labor market [will] they will start reducing salaries in the second half of the year”.
In the same speech, however, he noted that officials worry that the upward spiral in wages could continue even as headline inflation eases. The greater the signs of these “secondary effects”, the more the BoE will need to raise interest rates, he said.
Bailey’s comments came after the BoE’s chief economist, Huw Pill, said the credibility of the bank’s inflation fight was under threat as people and companies continued to “try to maintain spending before the pie got smaller”.
Economists expect a large drop in inflation in this week’s data, because the 54 percent increase in the energy price ceiling for gas and electricity introduced in April 2022 is excluded from the annual inflation calculation.
The upper limit of the energy bill of a household with average consumption is 2,500 pounds, compared to 1,971 pounds in April last year and 1,277 pounds in March last year. a year ago, according to the Resolution Foundation think tank.
Ofgem, the energy regulator, will announce the energy price cap for the July to September period on Thursday, with consultancy Cornwall Insight expecting average consumers to foot the bill. It drops to £2,054 this quarter.
Although data released on Wednesday showed that core consumer price inflation will fall sharply, economists expect the level of underlying price pressures to show little improvement.
Ben Nabarro, chief UK economist at Citigroup, forecast UK core CPI inflation excluding food, alcohol, tobacco and energy prices to rise to 6.5 per cent in April from 6.2 per cent in March.
Such a rise would underline BoE officials’ concerns about persistently high inflation, which has prompted the central bank to raise interest rates at the last 12 consecutive meetings of its monetary policy committee.
But the path of core inflation is uncertain, and other economists, such as Bruna Skarica, UK economist at Morgan Stanley, expect it to ease to 6.1 percent in April.
Skarica also expects food price inflation to moderate after high-profile milk price cut announcements by supermarkets. The annual growth rate of food prices reached a 45-year high of 19.2 percent in March.
Torsten Bell, chief executive of the Resolution Foundation, said that while the role of energy in driving high inflation is declining, “food is very much not”.
With poorer households spending roughly 15 percent of their budgets on food, compared to 10 percent for the richest households, inflation has been more heavily skewed toward the poor than at any time since records began in 2006.
“Everyone knows that food prices are rising, but it is less clear that the scale of the increase is fully understood in Westminster. . . The cost of living crisis is not over, it’s just entering a new phase,” Bell said.