Why has inflation gone up – and will it come back down?

UK inflation for January 2025 is back up to an annual rate of 3 per cent, the highest in 10 months, and slightly ahead of market expectations (having been similarly better than anticipated in December, when it came in at 2.5 per cent). It proves that Andrew Bailey, the governor of the Bank of England, was at least right in saying for many months that the “last yards” would be the hardest, as the Bank looks to be slowing overall price rises down to the target of 2 per cent.

Some volatile items such as food and airfares have pushed the rate up, but the underlying pressures are coming from domestic labour costs, which are a big factor in services inflation. Wages are going up by 5.9 per cent a year, and there is little sign that labour shortages are easing sufficiently to squeeze more inflation out of the system. The economic prospects remain subdued, and the political impact of persistent inflation in a slow-growing economy is uncertain...

It will certainly go higher before subsiding again. The Bank of England suggests it will hit 3.7 per cent in the autumn, and there will soon be more hikes in energy and water bills. Council tax will also be edging higher (albeit this is not reflected in the inflation indices). As an open economy, the UK may also find its inflation rate pushed up by the global rise in tariffs that seems inevitable.

No. Rates will still drift lower, given the broader slowdown in the economy, but the cuts will be slower to arrive than they might otherwise have been. When they do arrive they’ll be mostly beneficial, but people with floating-rate mortgages will enjoy the most immediate relief from the squeeze on household budgets.

Indeed, and this means that, for the many workers who are lucky to get an above-inflation pay rise, the value of their spending power in real terms is greater than, say, a year ago.

Labour certainly hopes so, and it’s one of the party’s favourite economic factoids – deployed by Keir Starmer at prime minister’s questions, for example. There will also be above-inflation increases in the minimum/living wage rates, and social security benefits will soon be uprated to keep up with prices, while the old age pension will rise in line with wages.

First, the very fact that inflation is rising again worries people – it’s not so long ago that it was raging (with the recent peak of 11.1 per cent in October 2022). Second, people simply do not “compute” the numbers as professional economists and statisticians do. So ministerial boasts about real-terms wages don’t register. What shoppers see is prices that are mostly still at historically high levels, and their perception is that their wages are falling behind and their living standards are suffering. So they’re not inclined to thank the Labour government for that – perceptions matter.

According to polling by YouGov, for example, some 78 per cent of Britons still feel that prices are rising faster than their income, against 13 per cent who think they’re keeping pace, and a mere 1 per cent who believe that “My income is rising faster than prices”. This is a most remarkable example of what might be styled economic cognitive dissonance. It is a profound problem for Labour, even if the voters don’t rate the opposition parties, because it makes the government look out of touch and ineffective.

To borrow one of Donald Trump’s favourite words – “groceries”. Trump says the price of eggs and gasoline helped him win the election, and there’s good reason to believe him. Covid and the energy crisis sparked by Vladimir Putin’s war in Ukraine were the driving force, but the fact is that increases in the price of the kinds of product most often purchased, and the bills people most often paid, were largely a product of the wave of global inflation in the first half of the decade – and it was Joe Biden who got the blame. Starmer can’t afford to ignore that lesson.

Not enough. Kemi Badenoch would certainly be better off talking more about the price of lamb and olive oil than engaging in esoteric arguments about Western values. Trump did both. She needs to rebalance her tactics.