Inflation set to hit target – but it’s going to hurt
- Inflation is expected to hit the Government’s target by the end of the year.
- However, it’s likely to come at the cost of stagnant growth and rising unemployment.
- It explains why the MPC decided to keep interest rates at 5.25% for the second consecutive time.
The MPC quarterly report was issued today: Monetary Policy Report – November 2023 | Bank of England
Sarah Coles, head of personal finance, Hargreaves Lansdown:
“Inflation is set to hit the government’s target – but it’s going to hurt. Rishi Sunak pledged to halve inflation – to 5.5% – by the end of the year. The Bank of England says it’s going to do even better– with inflation forecast to drop to 4.75% in the last three months of 2023. However, this will come at a real cost to the economy, with growth stagnating, and unemployment rising. It’s no wonder the Bank kept the engine of interest rates idling at today’s meeting. A rise under these conditions would risk pushing the economy into dangerous territory.
However, the Bank made it clear that there are still real risks on the upside for inflation. It said it’s likely to take longer for inflation to unwind than it did for it to build. It also warned that the oil prices could push higher, depending on events in the Middle East, which could drive another unwelcome upswing in inflation.
It might mean we end up with the worst of all worlds – stagnation, unemployment, inflation and even higher interest rates. It’s worth stressing that at the moment this is a possibility rather than a probability, but it’s why the Bank has left the door open for more rate rises if needs be.
Growth
Growth expectations are even worse than they were in August, when the Bank last issued forecasts. Higher interest rates are weighing on demand, and it estimates that at this point we’ve seen less than half of the eventual impact of those rates on GDP. It says growth in 2024 is likely to be almost entirely stagnant, before rising only very slightly to 0.25% in 2025, and 0.75% in 2026. This is well below historical averages.
Jobs and wages
As a result, weakness in the labour market is still on the cards. In fact, the picture emerging in these forecasts is even worse than the one drawn in August, showing unemployment rising to 4.3% in the last three months of this year, hitting 4.7% a year later, 5% the year after that and 5.1% by the last three months of 2026. This isn’t just higher than it previously expected, the rises are expected to go on for longer too.
This is expected to help depress private sector wage inflation. So far, this has come in ahead of forecasts – at 8% in the three months to August. It means the Bank is expecting wage rises to decelerate more slowly. However, wage inflation is still expected to fall below 6% next spring, below 5% by the end of 2024, and to around 3% by the end of 2026.
Inflation
All of this will put the brakes on inflation, which is now expected to fall more quickly than the Bank expected in August, to 4.75% in the last three months of the year. From there, it will keep falling – to 4.5% in the first three months of next year and 3.75% in the following three months – hitting 3.4% in the last three months of 2024. However, further out, it’s likely to fall more slowly than the bank had expected – hitting 2.2% in two years and 1.9% in three.
Rates
Given the economic fragility the Bank is expecting to emerge, it’s no surprise that it says rates are likely to peak lower than it forecast in August, at 5.3% in the last three months of this year, instead of 6% next year. It now expects them to fall faster too – to 5.1% in the last three months of next year and 4.2% by the same period of 2026.”
