Inflation Outlook Winter 2023

Hailey Low

10 years: Macroeconomist

In this video, Hailey unravels the factors driving the high inflation in the UK during 2022 and 2023, from COVID-19 supply shocks to energy price surges and Brexit impacts. She also discusses when and how we can expect inflation to fall, with projections aiming for a return to the 2% target by late 2026.

Macroeconomics

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Inflation Outlook Winter 2023

10 mins 13 secs

Key learning objectives:

Understand what factors are driving inflation
Understand when we can expect inflation to fall
Outline the Fed’s current position on interest rates and inflation

Overview:

In 2022 and 2023, the UK experienced high inflation due to various factors, including COVID-19 supply shocks, energy price surges from global conflicts, Brexit's trade and labour market impacts, and a tight labour market. Despite the Bank of England's efforts, inflation's decline is uncertain, with projections suggesting a return to the 2% target by late 2026. Meanwhile, the Federal Reserve, as of November 2023, maintains interest rates between 5.25% and 5.50%, with ongoing debates about the efficacy of current financial conditions in managing inflation above the 2% goal. These situations highlight the complexities in predicting and controlling inflation in a globally interconnected economy.

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Summary

What factors are causing the high inflation we’ve seen in the UK in 2022 and 2023?

The high inflation in the UK during 2022 and 2023 is attributed to several factors: the supply shock induced by Covid-19, the energy price shocks following Russia's invasion of Ukraine, Brexit-related trade barriers and labour market constraints, and a tight labour market driving higher wage growth.

The high inflation is primarily driven by several key components. The largest contributor to the Consumer Price Index (CPI) increase is 'Food and Non-alcoholic Beverages,' followed by 'Restaurants and Hotels,' and 'Housing and Household Services.' Additionally, with energy price rises dropping out of the CPI basket from April 2023, inflation drivers have shifted towards food and non-energy goods and services.

When and how quickly can we expect inflation to fall?

Determining the precise timing of inflation's decline is challenging due to global and domestic influences. However, the UK’s Office for National Statistics September 2023 figures suggest a gradual decrease. The Bank of England requires sustained drops in headline and core inflation to confidently return to the 2% target, expected by late 2026. While easing inflation is likely, the underlying pressures persist, with a 40% chance of inflation exceeding 4% by late 2025. Geopolitical tensions and economic fragmentation also pose risks to this outlook.

What is the Feds outlook for inflation as of November 2023?

As of November 2023, the Federal Reserve maintains the benchmark overnight interest rate between 5.25% and 5.50%. Despite aggressive monetary policy tightening, Fed Chief Jerome Powell notes that financial conditions might not be restrictive enough to control inflation, which remains above the 2% target. The Fed is open to further rate hikes, closely monitoring data to assess the impact of monetary policies. Wall Street shows divided opinions on future rate cuts, highlighting differing views on growth, inflation, productivity, and the Fed's response strategies.

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Hailey Low

Hailey Low, an associate economist at the National Institute of Economic and Social Research, specialises in macroeconomic modelling and forecasting. Her research interests include macroeconomic performance and policies, monetary policies, international trade and development, and the interplay between the financial and economic worlds. Prior to joining NIESR, she earned a master's degree in data analytics in economics and finance from the University of Glasgow and held various analyst and research roles.

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