When the Bank of England meets later next week, it is expected to try to look both at current price pressures and the wider economic picture.
Millions of UK households are set to see energy bills rise to the highest level for three years heading into the winter and gas prices have risen above 200p per therm for the first time since the end of 2022.
Inflation in the UK is at 2.9%, and it is expected to jump in coming months.
But despite those predictions, there appears to be broad agreement that the Bank will leave rates at 3.75%.
That’s because there is “no sign” of the so-called second-round effects of the price shock feeding through the economy, such as workers requesting wage rises or businesses hiking prices, according to Oxford Economics.
This gives the Bank “some breathing space,” added economist Alexander Harvey.
Yael Selfin, chief economist at KPMG, said that outside of the US, in places such as the UK, the economic environment has been “much weaker” than where it was in 2022, when the last inflation shock hit the world. UK inflation reached a record high of 11.1% in October that year.
Interest rates are already higher than four years ago, she added, and consumers, somewhat scarred by previous price hikes, have changed how they spend.
Also, four years ago “businesses were hiring aggressively, vacancies were at record highs, and more people were moving jobs than normal”, Harvey said, as the economy rebooted following Covid.
“The conditions were in place for employees to push for significant pay rises in response to a significant inflation shock,” he said. “That’s in stark contrast to the current labour market.”
Now, hiring is much weaker than average and there is less pressure to recruit – giving employees less leverage to demand higher pay.
Graphic by Miguel Roca-Terry and Jess Carr
