Back on the rise

The British Consumer Prices Index (CPI) has risen to a 3% high in January 2025, far higher than the 2.8% forecasted by most economic watchdogs. Whilst Chancellor Reeves insists her “number one mission” is “getting more pounds in people’s pockets”, the recent spike in inflation can be attributed to fresh labour policies such as the minimum wage increase.

UK inflation data, 10 years. Source: ONS

Previously, inflation reached a low point of 2% by July - down from its approximate 11% high in mid-2022. This was close to the Bank of England’s target, allowing them to reduce interest rates between August 2024 and February 2025 from 5.25% to 4.5%. 

However, these new figures will be disheartening, creating a grim economic outlook as 2025 continues. Subsequently, The Bank of England’s governor, Andrew Bailey, has warned that future cuts will be “gradual and careful”, as an inflation spike to 3.7% by mid-2025 is now expected.

Core inflation figures, which exclude food and energy owing to their volatility, are no less reassuring. At 3.7%, this is higher than the more general CPI statistics, this is especially attributed to increased costs in the service sector, where price hikes have been averaging 5% annually (Reuters).

Labour policies such as the increase in Employer’s National Insurance, and scheduled rise to the Minimum Wage for April 2025, have also contributed to increased economic uncertainty. This will place Rachel Reeves under added pressure, who has since been at the helm of such tax hikes and rising borrowing.

Not only has this provided a headache for the Bank of England in their endeavours to reduce interest rates, while also restricting Reeve’s leeway for her next budget this year. Reeves has already urged unprotected departments to find 11% worth of savings, yet with health accounting for 40% of spending and readily increasing, further tax hikes may also be in the picture.

The Liberal Democrats, who achieved major constituency gains in the 2024 general election, initially supported Chancellor Reeve’s efforts, understanding the need to reverse what they call “14 years of damage done by the Tories”. However, they have recently been critical of perceived insufficient support for social services. 

Conservative Shadow Chancellor Mel Stride has used more severe rhetoric, regarding Reeve’s economic policies as having created a “hostile climate for aspiration, investment and growth”.

Rachel Reeves in succeeding the Chancellorship has been provided an unenviable task of balancing the books whilst maintaining public services. Such recent inflationary omens will only hinder this task,  reversing the gains made last year.

It seems that the UK economy, after having crawled out of the recessionary woods last year, risks lurching back into the trees.