Inflationary expectations threaten the British economy
reported by Mehr News Agency, in 2024, the UK initially saw a promising decrease in the inflation rate. In this year, inflation decreased from a double-digit rate in early 2023 to 2.3 percent in April and then to 1.7 percent by September. This was attributed to the decrease in global commodity prices and the normalization of the supply chain after the pandemic.
Inflation, however, rose again to 2.6 percent by November 2024, driven by volatile food and energy prices and stubborn core inflation that has been on the rise since May was stable around 3.5 percent. Core inflation, excluding volatile items, remained high due to continued price increases in sectors such as housing and services.
Consumer and business expectations of inflation have also worsened. Based on adjusted data, firms expect prices to rise 3.8 percent next year, and long-term inflation expectations are near their highest level in 15 years. This is particularly worrisome for policymakers, as rising long-term expectations can make inflation more difficult to control.
Several factors have caused this stable inflation. Rents are rising at a record pace and wage growth is significantly above pre-pandemic levels, helping consumer prices.
While commodity inflation had eased as supply chains improved and spending patterns normalized during the pandemic, it has started to rise again. External risks, such as a potential global trade war following Donald Trump’s re-entry into the White House, could further disrupt the supply chain.
The approval of the first Labor budget in October 2024 has put more pressure on the British economy. While this budget included a tax increase, it also promised a significant increase in spending, twice the amount of tax revenue, and the gap created between taxes and consumption is supposed to be filled by borrowing. This additional liquidity, which is expected to increase inflation by nearly 0.4% in 2025, has added to the concerns.
Most importantly, economic growth in the UK has stalled, with GDP falling in the third quarter of 2024 after strong growth earlier in the year. This raises the specter of stagflation; An unfavorable combination of slow growth and continuous inflation.
Although the government’s economic stimulus is intended to combat recession, it risks further destabilizing inflation. Given that public frustration with rising prices has been a key factor in Labor’s electoral success, managing this delicate balance will be of great importance for the party.
