The overall inflation rate is slowly falling due to changes in energy prices, but underlying inflation is rising.
In January, the Prime Minister set out his top five priorities for 2023 – three of these pledges relate to the economy. This insight discusses how each is going, as we approach the middle of the year.
Easing the cost of living
The Prime Minister said that the Government would “halve inflation this year to ease the cost of living and give people financial security”.
Nine in 10 people say that the cost of living is one of the most important issues facing the UK today, according to the Office for National Statistics (ONS), in June 2023. Prices are also a main concern for many businesses, according to the ONS.
In this environment, people are buying less and spending more, according to the ONS’s retail sales data for May 2023, and about a fifth of people report using credit more than usual, in an ONS survey from June, as shown in the chart below.
Consumer price inflation was 8.7% in May 2023 – in other words, average prices for consumers increased by 8.7% compared with the same month last year, based on the Consumer Price Index (CPI). Prices have risen by almost a fifth over the last two years, as the chart shows.
When the Prime Minister made his pledge in January to halve inflation, inflation was higher than it is now: it was 10.5% in December 2022 and 10.1% in January 2023. At that point inflation was coming down and was expected to come down further, as it did.
Inflation is expected to fall significantly further during this year, for a number of reasons, but largely because of falling energy prices.
In May 2023, the Bank of England forecast an inflation rate of 5.1% for the final quarter of 2023, which would be around half of the inflation rate at the time the pledge was made. However, since then new statistics have been published that suggest that inflation could end up being higher than this:
- Wage growth was higher than expected.
- Inflation in prices for services was 7.4% in May, the highest rate since 1992.
The Bank of England Monetary Policy Committee has been raising interest rates since the end of 2021, with the aim of keeping inflation under control. In June 2023, they raised interest rates again, this time by 0.5 percentage points, to 5%.
So, will inflation be halved by the end of the year? We don’t know, and it may be close.
See the Library briefing Rising cost of living in the UK for more on inflation and its effects.
Growing the economy
The Prime Minister said the Government would “grow the economy, creating better-paid jobs and opportunity right across the country”.
Is the economy growing?
The economy isn’t yet growing in a sustained way; the size of the economy, measured by GDP, is roughly the same as just before the pandemic, as the chart below shows. This is unusual compared with trends seen in recent decades – for example, between 2011 and 2019, the size of the economy grew at an average of about 2% a year.
Forecasts made in the first half of June suggest that the economy might grow by 0.3% this year and 1.0% next year.
These forecasts were produced before the Bank of England’s latest announcement of higher interest rates. Higher interest rates are likely to make it harder for the economy to grow; economic theory suggests high interest rates encourage saving and reduce the amount that people and businesses buy.
Are better-paid jobs being created?
Employment has risen slightly through the year so far. In the three months to April 2023, 76.0% of people aged 16 to 64 were in employment, compared with 75.6% in the three months to December 2022.
But is there any evidence of jobs becoming better paid?
In this situation, we would expect to see pay increasing as employers compete for employees. And pay is indeed increasing in cash terms. For example, average weekly pay including bonuses was 6.5% higher in the three months to April 2023 than in the year before.
However, prices are rising faster than pay increases, so pay is falling in real terms. Average pay including bonuses was 2.9% lower in the three months to April 2023, compared with the year before. The chart above shows longer term trends.
See the Library briefing UK labour market statistics for more on earnings.
Reducing national debt
The Prime Minister said the Government would “make sure our national debt is falling so that we can secure the future of public services”.
The Government has a debt target, separate from the pledge. This focuses on underlying debt, excluding Bank of England debt. Underlying debt was equivalent to 89.6% of GDP at the end of May 2023.
The Government’s debt target is for the forecast of debt to be falling as a percentage of GDP, five years from when the forecast was made.
The Office for Budget Responsibility forecast in March 2023 that underlying debt as a percentage of GDP would increase in each year up to 2026/27 and then fall slightly in 2027/28. This would meet the debt target, as 2027/28 is five years from when the forecast was made.
Unlike the debt target, the Prime Minister’s pledge does not have an explicit timescale attached, although he said that his pledges were his priorities for 2023. It is very unlikely debt will be lower at the end of 2023 than at the start.
For more on debt and the deficit see the Library briefings The budget deficit: a short guide.
About the author: Lorna Booth is head of the Economic Policy and Statistics research section at the House of Commons Library.
Research on the rising cost of living in the UK, including the causes of inflation, the effect on households, and Government support.
This paper provides the latest statistics and analysis of employment, unemployment, economic inactivity and earnings in the UK.