UK Inflation Remains High Despite Recent Drop
Inflation in the UK dropped to 4.6% in October, down from 6.7% the previous month, but it is still more than twice the Bank of England’s target of 2%. Comparatively, inflation in the US fell to 3.2% and in the eurozone to 2.9% last month. The high inflation in the UK is primarily driven by the escalating cost of groceries, with food prices rising by 10.1% in October compared to the same period last year. The Office for National Statistics also reported that the price of food has increased by 30% since October 2021.
However, overall inflation in the UK decreased significantly last month due to lower utility bills. Ofgem, the energy regulator, dropped its price cap, resulting in a 16% decrease in domestic electricity costs and a 30% decrease in gas prices. Additionally, cheaper petrol and diesel contributed to an almost 8% decrease in motor fuel costs.
Despite the recent drop, there are concerns that inflation could surge again. The Opec oil exporters’ cartel could cause a spike in crude oil prices for Western energy importers like the UK, especially with the possibility of further unrest in the Middle East. The Russia-Ukraine conflict could also lead to geopolitical turmoil and an increase in natural gas prices.
Financial markets, however, seem to be disregarding these concerns. Following the release of the lower inflation data, the FTSE 100 share index soared, and traders increased their bets on future interest rate cuts. The bond market also rallied, with borrowing costs falling, as there is an expectation that the Bank of England will lower rates from the current 5.25% by June at the latest.
Despite the lingering dangers of inflation, the political focus has shifted towards economic growth. The Conservative Party is facing pressure to stimulate the economy, particularly in light of Labour’s 25-point lead in opinion polls. Ahead of the Autumn Statement scheduled for this Wednesday, numerous Tory MPs are urging Chancellor Jeremy Hunt to signal forthcoming tax cuts. Hunt has hinted that any future tax reductions would primarily target businesses.
One potential measure that could be made permanent is the “full expensing” policy introduced by Hunt in March. This policy allows firms to write off the cost of investments in qualifying plant and machinery against corporation tax. However, many small and medium-sized firms are struggling to invest due to financial constraints. The increase in corporation tax from 19% to 25% earlier this year has further limited their ability to take advantage of full expensing.
To support smaller firms, there are calls to raise the corporation tax threshold from £50,000 to £300,000 or more. This move would provide these companies, which employ two-thirds of the workforce and generate half of all growth, with an opportunity to strengthen their balance sheets in the aftermath of the pandemic.
Furthermore, there is a need to unlock more investment from UK pension funds. Currently, many innovative UK start-ups move abroad, list on foreign stock exchanges, or face closure due to a lack of long-term funding. The recent Mansion House reforms encouraged pension assets to be directed towards venture capital. However, UK regulators have set an unambitious 5% target, whereas US and Canadian schemes typically invest 15-20% in this category. Revisiting this issue in the Autumn Statement could help foster economic growth.
With the economy stagnant and many families struggling financially due to the impact of lockdowns and the cost of living crisis, there is a call for bold action. One suggestion is to raise the minimum threshold for income tax from £12,570 to £20,000 per year, while keeping the basic rate at 20%. This move would lift around seven million workers and potential workers out of income tax, benefiting poorer households more and reducing the burden on the basic state pension recipients.
Critics may raise concerns about the apparent cost of raising the personal threshold. However, the resulting increase in economic activity and spending, along with the reduced benefit payments, would outweigh the initial expense.
To implement these measures, both Chancellor Rishi Sunak and Jeremy Hunt, who is expected to succeed Sunak, need to demonstrate courage, conviction, and leadership, along with a touch of imagination.
More detail via Yahoo News here… ( Image via Yahoo News )