The Power of Prices: Does Labour Need To Worry About Inflation?
Nov 20, 2024
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Dan Hanson, Bloomberg's Chief UK economist, delves into the UK’s rising inflation rates, which recently hit 2.3%. He discusses the factors driving this increase and its potential to escalate further. Joe Mayes sheds light on the Labour government's concerns about how inflation could impact their political standing ahead of elections. The conversation also touches on the hidden workforce and discrepancies in employment data, highlighting how these elements complicate the current economic landscape and government policy decisions.
The recent inflation rise to 2.3% in October is influenced by temporary factors like the energy price cap, presenting challenges for the Labour government's fiscal policies.
New research suggests the UK's labor market could be healthier than previously thought, with potentially lower unemployment boosting economic productivity and wage growth amid inflation concerns.
Deep dives
Rising Inflation and Its Implications
The latest inflation figures for October revealed an increase to 2.3%, surpassing the Bank of England's target of 2%. This uptick is partly attributed to the energy price cap in the UK, which suggests a short-term fluctuation rather than a sustained trend. Experts anticipate that inflation may hover around 2% to 3% over the next year, mainly influenced by upcoming adjustments like increases in private school fees and the national minimum wage. The persistent inflationary environment raises questions about potential implications for interest rates and the government's fiscal policies.
Political Ramifications of Inflation
The Labour party is closely monitoring inflation trends due to potential electoral pressures similar to those observed in the recent U.S. elections. Higher inflation could lead to increased interest rate expectations, resulting in greater borrowing costs for the government. This places additional strain on Rachel Reeves’ fiscal rule, which mandates that government spending be covered by tax receipts, complicating her fiscal strategy. Therefore, the Labour Treasury team is cautious about stoking inflation through fiscal policy as they navigate the political landscape leading up to the next election.
Labor Market Insights and Economic Growth
New research indicates that the UK's labor market may not be as adversely affected by inactivity as previous data suggested, with around 1 million employed individuals possibly unaccounted for in official statistics. This revelation could improve the outlook for economic productivity and wage growth, addressing some inflationary pressures. Furthermore, the Resolution Foundation's analysis hints that the unemployment rate may be lower than reported, potentially indicating a healthier labor market. However, the unreliability of current data collection methods suggests that ongoing efforts to engage the workforce remain critical for accurate assessments and effective policy formulation.
The latest inflation data shows the pace of prices is picking up, rising to 2.3% in October. Our Chief UK economist Dan Hanson explains why, and if it's likely to increase further. Given the cost of living was a major election issue, our UK government reporter Joe Mayes discusses how worried the Labour government is and what their response might be. Hosted by Stephen Carroll and Caroline Hepker.