Economic Monitor
Economic Briefing Report: Inflation back into single-digits
Overall UK inflation has finally fallen back into single-digits. Much of the prior energy price rises have fallen out of the annual inflation calculation, bringing down the headline rate. The BRC-NielsenIQ Shop Price Index (SPI) suggests that food inflation is now easing, though with still-high input costs, the pace at which inflation falls is likely to be slow.
Retail performance over Q1 2023 has exceeded BoE and OBR expectations, and service sector activity continued to grow in April and into May, according to the latest flash Purchasing Manager’s Index. Consumer spending is thus likely to hold up retail demand over Q2, however, businesses continue to face elevated input costs. Although commodity prices and transport costs have fallen, higher wage settlements are increasing input costs and are largely fixed in the short term.
This persistence in inflation will hit consumer spending through elevated energy bills and high grocery and housing costs. However, sustained wage pressures will offer some relief to working households. This means the UK is likely to avoid a contraction in economic output this year, although the broader picture is one of a stagnant economy through to 2024. With inflationary pressures becoming embedded in the economy and the persistence of relatively high wage growth and food price inflation, the likelihood is of further interest rate rises by the Bank of England, with most city analysts now predicting rates beyond 5%.Harvir Dhillon, Economist at the British Retail Consortium
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