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FEW wouldGKYour browser does not support the element. call 2024 a brilliant year for the British economy. But one pleasant surprise was that inflation fell further, and faster, than . In early 2023 it was in double digits, but by April 2024 it was down to 2.3%, just 0.3 percentage points above the Bank of England’s target. On May 22nd, the day that figure was released, Rishi Sunak called a surprise summer election. The prime minister brazenly credited the drop to his government’s steady hand. Most voters thought otherwise and sent him to a heavy defeat at the polls six weeks later.Inflation fell as low as 1.7% by September. But , the old adversary is returning: the rate was back up to 2.6% by November (the latest month for which it has been published). That partly reflects swings in food and energy prices that have whipsawed headline measures. More troubling, a range of other closely watched gauges have started rising, or have stopped falling while still well above 2%.Clearest is core inflation, which excludes volatile food and energy prices. Annual core inflation fell sharply in the first half of 2024, but has bounced around 3.5% or so since May. The core rate tends to be a better indicator than headline inflation of trends in the months ahead, since the prices of what it measures—haircuts, cars, rent—usually move more slowly than those of fuel or groceries.Also worrying is that households and businesses no longer expect inflation to fall by much. Firms polled by the Bank of England say that they expect to raise prices by 3.8% over the next year, up from 3.3% when asked in August. Consumers’ expectations for inflation over the next 12 months have also risen recently, according to surveys by the central bank, Citibank and f, a market-research company.Worse, consumers also expect longer-run inflation to be higher (see chart 1). Adjusting a Bank of England survey for a shift in sampling around the pandemic, Pantheon Macroeconomics, a consultancy, reckons that five-year inflation expectations are close to their highest since the bank’s survey began 15 years ago. A survey by Citigroup, a bank, and YouGov, a pollster, shows a similar rise. There is little central bankers fear more than rising long-run inflation expectations; unless households and firms believe that inflation is anchored near its target, short-term rises can easily spiral out of control. Reining in post-pandemic inflation would have been far more painful had Britons not seen the Bank of England’s target as credible.So why is inflation persisting, and might it get worse? To start, in some sectors inflation never dropped by much (see chart 2). Rents are still rising at record rates. Inflation in services other than housing has been falling, but gradually and from a high level. Wages, which ultimately feed in to consumer prices, are also still rising much faster than before the pandemic (see chart 3). The jobs market may now be softening a bit, though how much is hard to tell. (The official survey on which unemployment figures are based is widely distrusted after its response rate collapsed during the pandemic.) Rising unemployment would cool inflation, but painfully.The decline in inflation that did take place was concentrated mainly in goods. Partly, that tracked worldwide moves in the prices of widely traded commodities and manufactures as stretched supply chains recovered from the pandemic. The peculiarities of lockdown also pushed the prices of some goods to unsustainable heights; people trapped indoors, often flush with savings and banned from bars, restaurants or going on holiday, compensated by buying more consumer goods. Some normalisation was bound to happen. But several years on, goods inflation has started to pick up again. A Donald-Trump-instigated global trade war could also easily snarl supply chains all over again.Another inflationary jolt is also due in 2025, from the spending promised in Labour’s first budget in October. So far, most attention has been paid to tax rises: in employers’ national insurance (a payroll tax), on capital gains and on inherited farmland. But Rachel Reeves, the chancellor, revved up planned spending by nearly twice as much as taxes, with borrowing plugging the gap. That extra cash will start hitting the economy over the next year; the Office for Budget Responsibility, the fiscal watchdog, reckons this stimulus could raise inflation by 0.4 percentage points in 2025.To make matters worse, just as inflation is proving stubborn growth has slowed, to zero in the third quarter of 2024 after a in the first half of the year. That raises the dread prospect of stagflation. After a decade of meagre growth, Ms Reeves’s instinct to stimulate the economy is understandable. But another wrestle with inflation, although at a much reduced level, would destabilise the economy too. And a government that owes many of its seats to public anger over inflation should understand the perils of rising prices better than most.
