UK’s Office for Budget Responsibility (OBR) to raise inflation estimates for next several years. They seem especially concerned with services inflation. New data from the Office for National Statistics (ONS) allowed us to make this correction. In February, the UK’s annual CPI inflation fell to 2.8%, down from 3% in January. Despite this slight decrease, the Bank of England remains focused on services inflation, which continues to be influenced by various economic factors.
Inflation is the big one. It is driven primarily by increasing energy and food costs, greatly shaped by trends that followed the 2022 invasion of Ukraine. The planned rise in employer National Insurance contributions will pose an acute danger to the services sector. This modification is sure to exacerbate the new inflationary pressures we are collectively facing. This new paradigm provides a difficult slate of challenges for policymakers and industry alike as they continue to adapt to an increasingly complex economic environment.
Unlike previous years, the situation infused by inflation is quite different. On a monthly basis, the increase in headline inflation would be somewhat muted by recent standards. April is almost here, which means another set of service sector price increases are coming. Keep an eye on rising prices for phone service and internet service, both of which could weigh quite a bit on overall inflation.
It would be different if bond yields weren’t rising. In other words, expectations for a Bank of England rate-cut have evaporated. Our interest forecasts on debt have skyrocketed. This increase further complicates the economic picture going forward. Looking ahead, the forecast for 2025 real growth has already been lowered from 2% to just over 1%. This reversal is a marked turn towards a more conservative economic environment.
As these events progress in the UK, all eyes again shift across the Atlantic to the United States. As always, business and consumer surveys are a key data point to watch to judge the trajectory of the US economy. The Core Personal Consumption Expenditures (PCE) index gets all the headlines. It’s the Federal Reserve’s favorite measure to use when quoting inflation. That index will be published later this week. It should provide further important insight into inflationary trends on both sides of the Atlantic.
In financial markets, gold prices have made big headlines, with recent valuations pushing toward $3,020 as of Wednesday. This points to notable continuing instability in global markets against a backdrop of rapidly deteriorating economic fundamentals.