The UK economy faces a persistent inflation challenge in 2025, driven by government policies, rising service sector prices, and uncertainty surrounding the impact of national insurance contributions.
This is nothing like the blow that struck the world economy during the pandemic, but the problem is that it is hard to see any significant positive aspects for 2025. As for longer term rates, the yield on 10-year gilts rose well above 4.5 per cent to the highest it has been this year. The most troubling aspect of the inflation numbers is that there is no sign of any let-up in the months ahead.
This is partly because of Government policy – the rise in tobacco duties, for instance, pushed up the index for November. Putting VAT on private school fees will increase the index in January, and the rise in vehicle excise duties will show through in April. The fact that many contracts are linked to the Retail Prices Index, up 3.6 per cent in November, will add further pressure. But the strongest driver of inflation will be what happens to service sector prices. They are rising by 5 per cent a year. The service sector is huge and labour intensive. Showing that average wages are up 5 per cent year on year will make it very hard for that chunk of the economy to hold prices down in 2025.and stay at or above 3 per cent through to October. If that happens, the pressure will be on the Bank to slow down any cuts in interest rates.The great unknown is how employers will react to the forthcoming increase in national insurance contributions (NIC), which takes effect in April. There will be some combination of higher prices and lower employment, but no one really knows what the balance between those two will be. If higher prices are passed onto consumers, that slows any decline in interest rates. If there are job cuts, then quite aside from the social and human damage of rising unemployment, that slows the economy – flat at the moment – even more. So it is a difficult outlook. There are two further factors that will complicate matters even more. Both come from the U
INFLATION ECONOMIC OUTLOOK INTEREST RATES SERVICE SECTOR GOVERNMENT POLICY
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