Treasury Acknowledges Impending Rise in Inflation

Treasury Acknowledges Impending Rise in Inflation

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The government has conceded that forthcoming key data will reveal another uptick in inflation, dealing a blow to Rishi Sunak and Jeremy Hunt’s efforts to curb price hikes.

Laura Trott, chief secretary to the Treasury, attributed the expected rise in inflation to elevated global energy prices, which prompted Ofgem’s adjustment of the price cap on household bills earlier this year.

Trott remarked, “I have always said [inflation] does not fall in a straight line. There will be bumps in the road, and … we can expect inflation to slightly increase when data for January is published.”

Official inflation figures due on Wednesday are anticipated to show the Consumer Prices Index (CPI) climbing for the second consecutive month, from 4 percent in December to an estimated 4.2 percent in January. This could potentially delay any interest rate cuts by the Bank of England from their current level of 5.25 percent.

The news on inflation is part of a series of economic indicators set to be released this week ahead of the March 6 budget announcement. Thursday’s Gross Domestic Product (GDP) data for December will determine if the economy has entered a recession.

Paul Dales, chief UK economist at Capital Economics, indicated it was “touch and go” whether Thursday’s data would confirm a recession, defined as two consecutive quarters of contraction.

Trott highlighted that the potential inflation uptick is driven by global energy prices, influenced by geopolitical tensions, resulting in Ofgem’s price cap increase of around £100 per household in January.

She reassured, “Any rise, I know, will be worrying, but independent forecasters and the Bank of England predict that inflation will halve again to around 2 percent over the next few months.”

Sunak, who previously achieved halving inflation from 10.7 percent, seeks positive economic news to facilitate tax cuts ahead of the upcoming general election.

Jeremy Hunt, the chancellor, will receive key forecasts from the Office for Budget Responsibility this week, shaping his decision-making for potential tax cuts.

Trott affirmed, “We know the job is not done, but because of the progress we have made, we have been able to afford tax cuts that reward work and grow the economy, as well as helping tens of thousands more people into work.”

This week’s data release will also include updates on the jobs market and wages, with wages expected to outpace inflation, a factor closely monitored by the Bank to mitigate inflationary pressures.

Simon French, chief economist at broker Panmure Gordon, expressed skepticism about an economic contraction but warned of the challenges posed by rising inflation against a backdrop of negative growth.