What are the key drivers behind the rise in UK inflation to 3%?

CGTN Europe

CGTN Europe interviewed Vicky Pryce, International Economist

Transcript

00:00Let's talk to the international economist Vicki Price. Vicki, welcome back.

00:04So UK inflation rising to 3%. How much of this was driven by things like higher energy costs

00:09and how much by the UK Finance Minister, the Chancellor of the Exchequer's recent budget?

00:16Well, the budget has had an impact in that with VAT now being imposed on school fees,

00:23that's led to an increase in that bit of the CPI, the Consumer Price Index, by 13%.

00:30Year on year. But that, of course, may not be repeated because, you know, though it hasn't

00:34been up to 20% that it could have been, it's unlikely that we're going to see many increases

00:40following this 13% rise that we've seen in January on school fees. But other things have

00:49been a little bit worrying, of course, the service inflation has gone up. So although the school

00:53fees one will disappear from the equation, so in February, we're not going to see it,

00:57there are other things. So service inflation has gone up a little bit more than had been

01:01anticipated by the markets, but actually, not as much as was anticipated by the Bank of England.

01:05So we have 5% service inflation right now. Up to a point, this is because, of course,

01:11wages are going up and are going up in crucial sectors, like the construction industry,

01:16hospitality, for example. So all this is passed on to consumers. So that's one of the reasons

01:20why the services are going up. Plus, of course, we are likely to continue to see things like

01:25water bills going up, council rates going up in the next few months. So the likelihood is that

01:30inflation is going to stay elevated for some time. And that, I think, is a concern. That's why the

01:35Treasury said what it did say. On the other hand, other things that happened are just accidental.

01:42So for example, airfares, airfares come down normally in January, they go up in December,

01:48come down in January, but because they didn't go up, you know, quite as much in December,

01:53and they didn't come down quite so much in January. So year on year, therefore, sort of,

01:58it just looked as if airfares are a bit higher, and therefore that's pushed the CPI up than would

02:03have been the case otherwise. So these things tend to even out over a period. Nevertheless,

02:09I think the important thing to remember is that the Bank of England is still expecting

02:12that inflation would go up to something like 3.7% at some point, and might even be a little bit

02:18higher if it averages 3.7% for some part of this year. And that of course means that they're going

02:24to have to look again at what happens to interest rates. Well, absolutely. How does this inflation

02:29jump affect the Bank of England's interest rate strategy? What's your call on that?

02:36Well, it's interesting to look at what the markets have done. The markets have

02:40raised interest rates slightly. So if you look at the bond yields, they've gone up a little bit.

02:46This suggests that the market think that perhaps interest rates are not going to come down so fast

02:49as perhaps we had anticipated originally. Now, the Bank of England, though, had already put that

02:54into its estimates. So when they spoke, when they cut interest rates quite recently,

02:58whereas the Fed didn't do so, I've just been listening to what your correspondent was saying

03:02there by the US, but they did say that inflation was going to go up, but it was going to go up

03:06because of external factors that were going to be transitory, and therefore things were going

03:10to stabilise afterwards. So my view is that we're still on the path of cutting rates. They may not

03:16be cut as fast as perhaps most homeowners are hoping, but mortgages are already beginning to

03:22decline mortgage rates. And I think what this means is that the markets think that interest

03:26rates will overall still be on a downward path a little bit less over the year.

03:30What does it mean for UK politics then and for people's lives? I mean, how does this inflation

03:35rise impact UK government's economic plans and budgetary decisions later in the year?

03:44Well, it is a problem for them if it means that companies are constrained by the higher costs

03:49coming in, for example, and therefore perhaps their growth isn't going to be as fast. But it's

03:54interesting, again, when you look at the details of what's been going on, input costs are down

04:00year on year to industry. Producer prices are up only a little bit. So what it means is that

04:05there aren't any huge pressures. Where the pressures on inflation will come, though, is

04:09because of the increases in national insurance contributions, which the budget announced back in

04:13October. And those, from what we understand from firms, will mean that they will pass some of that

04:18on in prices. So what it does mean, therefore, is that there will be an issue in terms of

04:24affordability of anyone going about their business because prices will be going up.

04:29On the other side, and positively, wages are going up quite significantly, much higher than

04:34inflation. So there is still the possibility that the consumer's confidence, which has been quite

04:39low, will recover because of those real increases. And maybe, therefore, some of the growth

04:45participations of the government will be met. But I'm afraid, overall, if you balance all this out,

04:50expectations now are that we see lower growth in 2025 than was expected originally.

04:56Vicky, good to talk to you. Thanks for that. The international economist Vicky Price in London.

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