The recent Budget announcement has raised concerns about potential inflationary pressures in the macro landscape. Bank of England governor Andrew Bailey has warned that the policies introduced by Rachel Reeves could lead to an increase in inflation. Companies, especially those in service sectors heavily reliant on labor, are bracing themselves for the impact of a £25bn Budget hit, with many considering raising prices to offset rising costs.

Consumer price inflation has been on a steady decline, reaching just 1.7 per cent in September, below the Bank of England’s expectations. The Bank responded with a 0.25 basis point rate cut, bringing the base rate from 5 to 4.75 per cent. However, the path ahead has shifted, with market analysts ruling out a third rate cut by the end of the year due to emerging inflationary pressures.

There are three main reasons why a temporary halt in the inflation battle seems likely. Firstly, companies facing higher payroll costs may pass these expenses onto consumers through price hikes. This is particularly challenging for businesses with lower margins, as they have limited options for mitigating the impact. Some companies, such as BT, Sainsbury’s, and JD Wetherspoon, have already warned of potential price increases to offset rising costs.

Secondly, wage growth remains strong, with private sector regular pay at 4.8 per cent. The Bank is concerned that wages may not decrease to a more sustainable level, leading to above-inflation pay rises and increased pressure on private sector employers to match these increases.

Lastly, increased spending on hospitals and schools as outlined in the Budget is expected to drive inflation further. The Office for Budget Responsibility predicts that heavy front-loading of spending will not only impact workers but also the materials and goods being purchased, adding 0.5 per cent to CPI next year.

These factors have shifted expectations around rate cuts, with previous predictions of a 4 per cent rate in the first half of next year now unlikely. Analysts believe that the Budget, combined with potential inflationary pressures from the US election results and currency fluctuations, will prompt the Bank to proceed cautiously with rate cuts.

In conclusion, the Budget has raised concerns about inflation and its impact on monetary policy. Analysts are revising their forecasts, with some predicting a slower pace of rate cuts and a terminal rate of 4.25 per cent by the second quarter of next year. The road ahead for the economy remains uncertain as policymakers navigate the challenges posed by rising inflationary pressures.