Friday, November 22, 2024

Why Britain’s inflation nightmare may not be over

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Reeves’s policies raise the risk of “structural shifts in wage and price-setting behaviour”, a key concern of the MPC, which could keep inflation higher than it is comfortable with.

The Bank warned that the “combined effect” of the increase in employer National Insurance contributions and a sharp rise in the minimum wage were “likely to increase the overall costs of employment”. Companies may choose to pass this on to customers in the form of higher prices.

The Bank suggested there were already “some signs” that this scenario was materialising, with “services inflation remaining elevated”.

The Bank added: “The impact of the Budget announcements on inflation will depend on the degree to and speed with which these higher costs pass through into prices, profit margins, wages and employment.”

These are the key risks to inflation from the Budget.

Pay

Reeves was proud to announce another big rise in the National Living Wage in the Budget following this year’s near-10pc jump. The Chancellor confirmed a 6.7pc increase to come in April. The National Minimum Wage, which is paid to 18 to 20-year-olds, will meanwhile rise by 16.3pc to £10 an hour.

Welcome as this is to workers on the legal minimum, it also adds to pressure on companies’ costs.

The impact is magnified by the fact that many businesses must raise pay across the board to ensure they remain competitive. A supermarket manager does not want to see their pay premium over an entry-level shop floor worker eroded, for example. If they are paid £13 an hour and the National Living Wage rises to £12.21 an hour, as it will next year, they may well ask for a raise.

Some businesses surveyed by the Bank’s agents “report that they are coming under pressure to maintain pay differentials between scales”, the Bank of England’s Monetary Policy Report says.

Surveys of company bosses suggest pay rises will slow a little more next year, then stabilise at still high levels – between around 4pc and 5pc – which is worryingly strong for future inflation.

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