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UK Households Should Start Feeling Better Off as Election Looms
NIESR
2024.02.13
Inflation is set to fall below the Bank of England’s 2 per cent target in April. We project that inflation will fall to 1.5 per cent in April as Ofgem reduce the energy price cap by 14 per cent and the high inflation in early 2023 ‘drops out’ of the headline measure.
We expect the Bank of England to start cutting interest rates in May. However, we expect further cuts to happen more slowly than is currently implied by market expectations given persistent core inflation, elevated wage growth and geopolitical challenges.
On current plans the government meets its fiscal targets. But, it is simply not credible that the next government ? whichever party may form it ? will feel itself bound to the large fiscal tightening planned for 2025 and beyond. NIESR continues to stress the need to increase public investment, rather than put in place tax cuts that will have to be reversed in the not-too-distant future.
The main risks to our forecast are geopolitical. Shipping costs between China and Europe have risen by around 150 per cent since the beginning of October. An escalation of the conflict in Gaza could lead both shipping costs and oil prices to rise further, pushing down on GDP and up on inflation.