IoD press release  Inflation rises but November rate decision remains finely balanced

“High energy costs continue to push up headline inflation, and put pressure on businesses, households and the resilience of the UK economy. But it is what is happening beneath the surface that matters most for the Bank of England’s next interest rate decision, and this data doesn’t really shift the dial for the Bank. Energy costs remain the main driver of inflation, and while underlying inflationary pressures in services and core inflation measures moved up, both have done so in line with Bank expectations. Meanwhile food price inflation has come in well below the levels expected. The labour market shows a mix of resilience and risk, with employment holding up and unemployment down, combined with further falls in vacancies among smaller businesses.

“For now, the Bank facing a finely balanced decision in November. Household inflation expectations have risen, and the longer that energy prices remain elevated, the greater the danger of higher inflation becoming embedded in wage and price-setting. But firms’ expectations for wages and prices have remained relatively stable, with costs so far largely eroding margins rather than pushing up prices. With borrowing costs already elevated, the Bank must weigh the risk of acting too late against that of unnecessarily weakening investment and employment. The case for a precautionary rate rise strengthens the longer that headline inflation remains elevated, but is not yet overwhelming.

“Meanwhile, persistently high inflation is adding to the pressures facing households and businesses. Next week’s Budget will need to tread a careful line. Targeted support for those most exposed to rising energy costs could help cushion the immediate shock, but how that support is funded matters. Further increases in the costs of doing business would undermine the very investment, hiring and economic resilience that the Government needs to protect.”