On 6 March 2024 the Chancellor will present plans for the economy, including taxation and spending, in the Budget. What happens during and after the Budget?
The cost of living continues to dominate UK economic news as inflation reached a 40-year high, and real wages continue to fall for many workers. The Bank of England raised interest rates at the start of May and further increases seem likely.
Inflation continues to rise
Inflation reached a 40-year high in April. The Consumer Prices Index (CPI), which shows the rate at which the prices of goods and services bought by households rise or fall, rose by 9.0% in the 12 months to April 2022, up from 7.0% in March. This can largely be attributed to the price rises for gas and electricity in April following the increase in Ofgem’s cap on energy prices.
Economic growth also weakened in March, with a 0.1% fall in GDP compared to February. The high rates of inflation, coupled with relatively weak economic growth forecasts, has led some economic commentators to refer to the prospect of ‘prolonged stagflation’ in the UK economy. It has been reported the UK economy is experiencing the “worst combination of surging prices and zero growth” – stagflation – since the 1970s.
The BoE responded by raising interest rates
In response to rising inflation, the Bank of England’s Monetary Policy Committee (MPC) raised interest rates by 0.25 percentage points to 1.0% on 5 May. This was the fourth meeting in a row the MPC has raised rates, which are now at the highest they have been since March 2009. The minutes of the May meeting explain the interest rate was raised due to the “current tightness of the labour market, continuing signs of robust domestic cost and price pressures, and the risk that those pressures will persist”. The MPC’s central projection is that inflation will rise to slightly over 10% in Q4 2022, well above the 2% inflation target.
The increase of 0.25 percentage points was voted for by a majority of 6-3 by the MPC members. The members who did not vote for this had instead wanted to raise interest rates by 0.5 percentage points to 1.25%. Most members agree a further rates rise may be necessary in coming months.
Earnings keeping up through bonuses
The high rate of inflation has led to a fall in real wages in recent months, and they are expected to continue falling. However, pay including bonuses grew in the latest quarter, suggesting many employers are reacting to high inflation by increasing bonuses rather than regular pay.
This has led to a gap in earnings growth between the private sector, where bonuses are more significant, and the public sector. After adjusting for inflation, there was annual growth of 1.8% in average pay including bonuses in the private sector in the 3 months to March 2022. In comparison, pay including bonuses fell by 4.3% in the public sector.
Unemployment at its lowest since 1974… and below the level of vacancies
Although there are almost half a million fewer people in employment now than before the pandemic, there are over 100,000 fewer people who are unemployed. The unemployment rate has fallen to its lowest rate since 1974.
Meanwhile, the number of job vacancies continues to increase, with vacancies now at almost 1.3 million. This is half a million more than levels prior to the pandemic.
As unemployment is currently just over 1.25 million, this means that the number of vacancies is now at a higher level than the number of people who are unemployed. The ONS have reported this is the first time this has happened since records began in 2001.
The ratio of vacancies to employee jobs is also at a record high.
Many workers are likely to seek out higher wages due to the higher cost of living, while employers may feel they need to pay higher wages to keep hold of employees. This may lead to further inflationary pressures within the UK economy.
- Rising cost of living in the UK, Commons Library briefing
- UK Labour Market Statistics, Commons Library briefing
- Economic Indicators, Commons Library briefing
About the author: Andrew Powell is an economic researcher at the House of Commons Library.
The Government cut National Insurance rates for employees from January but freezes to tax thresholds in April will increase personal taxes, in real terms.
Inflation fell to 3.9% in November but the impact on households may have been higher.