UK inflation saw yet another larger than expected increase in February to 6.2% year-on-year on the Consumer Price Index (CPI) measure. With pay growth not keeping up and with the peak in inflation still not likely until April, this still implies a worsening financial backdrop for many households.
As widely expected, there was a bit more help for households in the Spring Statement, including a fuel duty cut. However, though helpful, the package of measures looks likely to be only a partial offset for household finances.
Comments on the February inflation figures
February UK CPI came in a bit higher than forecast at 6.2%Y after 5.5%Y (consensus was for 6.0%Y). Inflation therefore remains at its highest levels since the early 1990s on the CPI measure. It still looks set to rise further.
This clearly remains a very long way above the Bank of England’s 2% CPI target, as well as being higher than the Bank of England (BoE) staff projection for February’s CPI in February’s Monetary Policy Report (5.9%Y).
The main drivers of the rise in CPI inflation in February were the recreation and culture component, clothing/footwear, food/non-alcoholic beverages and furniture/household goods. Some of this will be noise: computer games were one of the reasons for the rise in recreation/culture and these prices can be volatile – driven by the composition of bestseller charts; clothing price increases (month-on-month) were actually a bit below ‘normal’ in February, but because there was an unusual fall in 2021, year-on-year inflation in this category jumped. Some will probably reflect supply chain problems. Some will also reflect distortions from the pandemic (where in February last year significant social distancing restrictions/guidance were in place).
Inflation driven by these things could then still be described as at least partly transitory, but there were no downward contributions to inflation from any of the major categories this month. Services inflation rose from 3.2% to 3.5% (though hasn’t been clearly trending anywhere in recent months) and my core services inflation proxy remains higher than it was pre-pandemic (though isn’t at high levels relative to its pre-Great Financial Crisis range).
Overall, there wasn’t much to comfort Monetary Policy Committee (MPC) members – inflation remains well above target and sources of upside pressure were broad. Household survey measures of inflation expectations have been rising and the labour market still looks tight. The MPC’s last rate hike may have been a dovish one, but it is unlikely to have been the last this year.
Comments on the Spring Statement and OBR fiscal forecasts
As widely expected, there was a bit more help for households in yesterday’s Spring Statement, including a fuel duty cut. The deficit was revised up for the coming fiscal year partly as a result, but was lower further out. Despite today’s giveaways, the big picture is still a tightening in the fiscal stance over the coming years and there is still an increase in the tax-to-GDP ratio (up 3.3% of GDP between 2019-20 and 2026-27). The OBR (Office for Budget Responsibility who publish all the fiscal forecasts that come out alongside the Chancellor’s announced policy measures) unsurprisingly highlight that there is quite a lot of uncertainty attached to their forecasts at the moment. There is a significant difference between the economic forecasts of the BoE (more pessimistic) and OBR.
The deficit in 2022-23 is £16bn higher than the OBR’s October forecast, despite the fiscal finances coming in better than expected in 2021-22. That reflects record high debt interest costs on one hand, and the package of near-term measures to help households on the other. This package includes the previously announced measures (rebates) to support households facing higher fuel bills as well as measures announced for the first time in the Spring Statement including the temporary 5p fuel duty cut, plus an increase in the NICs threshold.
In terms of what that means for household finances, though helpful, the OBR suggest that that package of measures will offset about half the hit to household finances from higher energy/fuel bills “and a third of the overall fall in living standards that households would otherwise have faced”. The OBR also point out that the package of changes for households “amount to a personal tax giveaway” that “reverses just over a quarter of the aggregate yield from the personal tax rises that were announced during 2021”.
The deficit figures are flattered by student loan reforms: Reforms to student loans, that make long-term fiscal savings for the government, are recording up front in the deficit figures. That, for example, lowers the deficit by more than £11bn in 2022-23 even though the cash implications are much smaller (for students affected, the costs are paid over decades). The student loan changes help explain why the deficit forecasts are lower than they were in October from 2023-24 onwards, though most of the improvement is driven by assumed higher tax receipts (much of which relates to wages and salaries).
Forecast contrast: The OBR have revised up their CPI forecasts substantially and revised down their GDP forecast. However, their forecast changes still leave the OBR much more optimistic on GDP than the Bank of England for 2023 and 2024. For example, in 2023, the OBR’s forecast for GDP growth is 1.8%, while the BoE’s is 1.3%. There is a significant amount of uncertainty around the economic outlook at the moment. A range of outcomes are plausible for the UK economy and with commodity prices as volatile as they have been recently, it is difficult to pin down with confidence which set of outcomes is the most likely. I continue to pencil in at least one more rate rise from the Bank of England this year. As for fiscal policy, pressure may grow over the year for even more fiscal help for households as upcoming energy bill increases are digested and depending on what happens to commodity prices from here. It is hard to disagree with the OBR that risks to both the economic and fiscal outlook are “elevated”.
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