A quarter of a point is the reduction in the official rate announced by the Bank of England on Thursday, November 7, to 4.75%. This is the second drop, after that of August, which marked the end of a period of almost three years of consecutive increases aimed at controlling galloping inflation that reached a maximum of 11% in 2022.
“Inflation fell to 1.7% in September, its lowest level since 2021explains Susannah Streeter, financial markets specialist at Hargreaves Lansdown. Households are being cautious and reducing their consumption, which is unlikely to drive up prices. » Regarding services, although the price increase remains high (+4.9%), it tends to slow down after the 5.6% in August.
But the situation continues “extremely volatile”estimates Danni Hewson, financial analyst at AJ Bell. The budget presented on October 30 by the Chancellor of the Exchequer, Rachel Reeves, will revive inflation, said the governor of the Bank of England, Andrew Bailey, on Thursday, commenting on the reduction in the official interest rate. It will increase to 2.75% in 2025 and will only fall below 2% in 2027, according to the institution.
In particular, the increase in social contributions paid by employers, which should contribute 25 billion pounds (30 billion euros) a year to the State. “These additional costs, which make employment more expensive, will be reflected in the prices charged by companies”M thinks.me Street.
Added to this is £70bn of spending to fund infrastructure and public services, particularly the healthcare system. “These additional funds injected into the economy can create an inflationary increase”notes Mr. Hewson.
Review the forecast
Wage growth (more than 5% for several months) also does not seem to slow down. It is driven by the high inactivity rate in the UK, which represents almost 22% of the working age population. Forced to draw on a limited talent pool, employers have had to raise wages. The government has also approved salary increases for public sector employees (from 4.75% to 6% for the period 2024-2025) and a 6.7% increase in the minimum wage from April 2025.
Inflation in the UK will further be driven by a number of external factors. “Energy prices are expected to rise following fluctuations in oil prices caused by the war in the Middle East”Hewson emphasizes. the 1Ahem In October, electricity and gas prices, which are set by the government every three months, rose by around 10% in England and Wales. They are expected to increase further in January 2025, due to increased demand during the winter period.
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