Across the pond, inflation in the United Kingdom is undergoing a dramatic resurgence, fueled by increasing expenses in the services sector. The most recent data shows that services inflation has re-accelerated to 5%, a rate definitely above what we would have predicted a few months ago. Economists and policymakers are sounding the alarm about this alarming trend. As Treasury officials look ahead to next month’s Autumn Budget, many are bracing for further rounds of tax hikes aimed at consumers and businesses alike.
The Centre for Policy Studies has already raised the alarm over the growing financial pressure being placed on employers. It currently costs an additional £2,367 more to employ a worker on the minimum wage than it did in 2024. Business impact This unprecedented increase in labor costs compounds the economic pressures on businesses that are already struggling with inflationary headwinds.
Table 1 Long-term impacts of expected changes in CPI
Table 2 Short-term increases in Consumer Price Index (CPI) in the UK
It is up from 3% in January and on track to exceed 4% by September. Inflation trends in the United States have remained consistent during the last year. At the same time, European inflation appears to be much more under control than the picture here in the UK. This huge chasm invites concerns as to the durability of the UK’s economic recovery at a time of heightened uncertainty.
In fact, the Bank of England has pointed to this economic uncertainty as the most important factor affecting its monetary policy choices. The PBOC has already cut interest rate three times this year, trying to bolster growth amid a stark trade and manufacturing slump. Public finances are heavily strained given soaring interest payments and concerns about the 30-year gilt yield. Consequently, the central bank will have to continue walking a very fine line. Government finances are already strained by the steeply rising 10-year gilt yield, and there’s more pain in store unless things change.
Food inflation has not helped either, rising from 4.5% in June to now 4.9%. This unprecedented jump puts even more pressure on household budgets and either directly or indirectly, signals much worse news for the economy as a whole. That kind of inflationary pressure, these analysts argue, will most certainly cause consumers to change their spending habits in the months ahead.
Just as the UK approaches what’s called its Autumn Statement, the fiscal picture is very cloudy. Many economists predict that the government’s fiscal policies could tighten further, leading to increased taxes as officials attempt to manage the ongoing economic challenges. Yet we have little understanding of how any of these proposed measures would impact consumers and businesses. Early signs point to them doing the exact opposite — ramping up financial pressures during this already rollercoaster time.