Britain has an inflation problem and we need to stop making it worse: SIMON LAMBERT

Britain has an inflation headache. Fresh figures from the ONS revealed consumer prices inflation stuck at 3.8 per cent in August, way above the 2 per cent target.

Inflation is also considerably higher than the 2.9 per cent level in the US and the 2.1 per cent figure in the Eurozone.

This is unfortunate both for the Chancellor and the Bank of England, which will reveal its latest interest rates decision today.

It’s bad news for Rachel Reeves, as although she claims that she is ‘determined to bring costs down and support people who are facing higher bills’, her policies are being blamed for pushing prices up.

And it is bad news for the Bank of England, as it really needs not to look like it’s been caught on the hop by inflation again.

The Bank’s rate-setting Monetary Policy Committee is widely expected to keep base rate on hold at 4 per cent today – and the inflation reading will have had little effect on that.

What it has done, however, is dampen expectations of another interest rate cut in 2025. And if one does squeak in, markets now forecast that it won’t come until December.

Earlier this year, the Bank of England was relatively sanguine on the rising cost of living, indicating it was comfortable with a short-term uptick that it expected to subside and not drive people and businesses’ inflation expectations higher.

Now rate setters appear more concerned. With the economy slowing and unemployment rising, a rate cut last month should have been a done deal but instead it snuck through 5-4.

That decision only arrived after they had to take a second vote, as there had initially been four votes for a hold, the same number for a 0.25 per cent cut - and one for a 0.5 per cent cut.

A House of Commons Library Economic Update report at the end of August laid bare the problems that the Bank of England and Rachel Reeves face.

It said that although there were ‘signs of a gradual economic slowdown’ there were also ‘signs of persistent inflation’.

This latter element is exactly what the Bank of England wants to avoid, and the latest inflation report does it no favours in that regard.

The temporary uplift from energy prices and higher employment costs that it had felt confident looking through has now shifted to inflation being driven by food prices, up 5.1 per cent annually. And grocery inflation is something people really notice.

The Bank expects inflation to peak at 4 per cent in the coming months and then fall, but not get back to the 2 per cent target until around the middle of 2027.

Unfortunately, with the cost-of-living spike fresh in memories, along with nagging doubts over the Bank’s record on inflation recently, people and businesses aren’t entirely convinced that’s not too rosy a view.

The House of Commons report also pointed out another inconvenient fact. It said: ‘There are also signs that the UK is becoming an international outlier, with the highest rate of inflation in the G7 and a higher rate than the EU and Eurozone averages.’

As noted above, our 3.8 per cent inflation is well above America’s 2.9 per cent reading, and that comes despite the US economy having much better 2.1 per cent annual growth and dealing with the inflationary effects of President Trump’s scattergun tariff policies.

Meanwhile, the euro area also has slightly higher GDP growth at 1.5 per cent than the UK’s 1.2 per cent and lower inflation.

To be fair some of the major players are growing much slower than us, with Germany at 0.2 per cent annual GDP growth, France at 0.8 per cent and Italy at 0.4 per cent but Spain with its 2.8 per cent growth has inflation at just 2.7 per cent.

The belief Britain has an entrenched inflation problem is reflected in government bond yields.

Ten-year UK gilts trade at about 4.6 per cent, compared to 4 per cent the for the US, , 2.6 per cent for Germany, 3.5 per cent for France, 3.5 per cent for Italy and 3.2 per cent for Spain.

Even Greek ten-year debt carries a lower rate at 3.3 per cent, while it has 3.1 per cent inflation and 1.7 per cent annual GDP growth.

Part of our current inflation issue is self-inflicted. Rachel Reeves made a mis-step by raising employer national insurance and the living wage at the same time – as well as dishing out big public sector pay rises.

Businesses have cut jobs and passed on some of the costs to customers, whether that is other firms or consumers. Concerningly, a Lloyds’ UK Sector Tracker report claims they have held back on passing on some costs though, so there could be worse to come.

We now find ourselves staring down the barrel of two months of speculation as to what the Chancellor may do to remedy the UK’s finances and deal with her own fiscal ‘black hole’ in the Budget.

That’s pretty much the last thing households, businesses and the economy need.

What Britain needs to do is stop making life harder for companies, workers, farmers, retailers, restaurants, pubs, families… the list goes on.

The sooner we get a grip, the better.