What impact will the Budget have on inflation?
As we approach the Budget, due to be announced on 30 October, one of the key concerns is the potential impact on inflation.
With recent data showing a sharp drop in the UK’s inflation rate, Chancellor Rachel Reeves faces a challenging balancing act as she prepares to unveil her plans.
According to the latest Office for National Statistics (ONS) figures, inflation fell to 1.7 per cent in August, marking its lowest level in three and a half years.
This comes as a welcome boost ahead of the Budget, especially as the Bank of England could potentially cut interest rates further in response.
The decrease in inflation was driven by lower petrol prices and a drop in airfares, with the Bank of England’s two per cent target now well within reach.
However, there are still concerns that inflation could rise again, particularly with Ofgem’s recent increase in the energy price cap.
The Budget and inflation
The Chancellor has made it clear that low and stable inflation will be a central goal of her first Budget, as part of Labour’s focus on protecting household incomes, repairing public services, and rebuilding the foundations of the economy through infrastructure investment.
Reeves has inherited challenges, with Labour reporting a £22 billion black hole in the public finances, which they attribute to the previous Government’s economic policies.
To address this, the Budget may include tax rises and spending cuts worth £40 billion.
While these measures are necessary to balance the books, they could also impact inflation.
Increasing rates of Inheritance tax (IHT) and Capital Gains Tax (CGT), and reduced Government spending could help control inflation by dampening demand.
However, they could also slow economic growth, a concern already highlighted by the one per cent GDP growth over the past year.
The Bank of England’s interest rate decisions
is growing speculation that the Bank of England will cut interest rates by a quarter of a per cent in November, reducing borrowing costs to 4.75 per cent.
While this could offer some relief to households and businesses, the upcoming Budget could influence the Bank’s decision.
For example, if the Budget involves spending cuts, this could ease inflationary pressures, paving the way for further rate cuts.
On the other hand, if the measures fall short of addressing the public finances’ challenges, the Bank may have to maintain higher rates for longer.
What does this mean for you?
Whether you are a business owner, or an individual concerned about the rising cost of living, the Budget and its impact on inflation will have far-reaching implications.
If the Chancellor decides to increase taxes and cut spending, you may find your budget tightening even further.
Ongoing inflation could erode purchasing power, while higher interest rates could affect loan repayments and savings returns.
As we await the details of the Budget, you should consider how these changes might affect your financial plans.
For more information about the Budget and how to prepare for it to mitigate its financial impact, please contact us today.
