Analysis

UK inflation forecast: what will happen to rates in 2023, will they halve in line with Rishi Sunak’s pledge?

The Prime Minister promised to ease the burden of the cost of living crisis for people across the UK by tackling price rises. But is this pledge achievable?

For most of the past year, people across the UK have been struggling with the worst cost of living crisis for decades.

Inflation rocketed to record levels throughout 2022, as the war in Ukraine pushed up the price of everyday necessities, including food, energy and fuel. At the same time, wages have failed to keep pace with this seismic change in everyday costs.

As we moved into the latter part of the year, interest rates soared in response to the political turmoil originating from Liz Truss’s short time as Prime Minister. This applied a further squeeze to millions of mortgage payers and home buyers across the UK.

With a recession looming - an economic event that’s likely to increase unemployment levels - Rishi Sunak gave a speech on Wednesday (4 January) that sought, in part, to reassure the British public that the Conservatives can be trusted with the economy. One of the Prime Minister’s key pledges was to halve inflation this year.

But is this target achievable - and if inflation comes down, does it mean the cost of living crisis will ease?

Rishi Sunak has pledged to ‘halve’ inflation - but is it the promise it’s cracked up to be? (image: AFP/Getty Images)

What is the current UK inflation rate?

Inflation is an economics measure that shows how much the price of goods and services have risen over a set period of time. Another way of thinking about it is that it shows how much the value of a country’s currency has decreased.

As of November 2022, the latest month for which we have data, the Office for National Statistics’ key inflation yardstick - the Consumer Prices Index (CPI) - showed prices were an average of 10.7% higher than they were in the same month a year previously. This figure showed the rate of price rises had slowed, as the CPI for October was 11.1% - the highest level for 41 years.

What did Rishi Sunak say about inflation?

In his speech on Wednesday (4 January), Rishi Sunak outlined his ambitions and policy priorities for the year ahead. One of his key pledges focused on inflation, which he said he would halve in 2023.

He said achieving this goal would reduce the burden of the cost of living crisis and “give people financial security”. He also urged the public to “judge [the government] on the effort we put in and the results we achieve”.

However, Sunak did not outline how he planned to reduce the rate of inflation. Indeed, the speech gave very little detail on how the government would achieve any of the goals the PM set out.

Can Rishi Sunak reduce inflation?

The first thing to point out is that experts have forecast that inflation is going to fall anyway.

In its November 2022 Monetary Policy Committee report, the Bank of England predicted that inflation will decrease below 10% after March 2023 before dropping below 2% in the first half of 2024. It said it expects that by the end of 2023, inflation will be between 5% and 6%.

One of the UK central bank’s key jobs is to keep inflation at or near 2% - a rate deemed to be high enough to encourage a level of spending that (in theory) encourages a healthy rate of economic growth. It controls the rate of inflation by adjusting interest rates - something it does independently of the government, but with reference to government policy.

Basically, it will be the Bank of England rather than Rishi Sunak that will be doing most of the leg work in bringing inflation down over the next year.

The Bank of England has a bigger role to play in reducing inflation than Rishi Sunak (image: Getty Images)

Meanwhile, progressive think tank the Resolution Foundation has projected that global trends will also push inflation down. In a report it published in December, it said price rises in the UK will slow as a result of falling demand for US goods (which influences the world’s economy given the dollar is the main international reserve currency), the easing of Covid-related supply chain bottlenecks, and a drop in energy prices as Europe continues to wean itself off Russian oil and gas.

So, while the UK government has been very keen to blame international pressures for the scale of the cost of living crisis, Rishi Sunak is clearly not prepared to give these same issues the credit they deserve for easing inflation.

The second thing to point out is that falling inflation does not mean falling prices. Nor does it necessarily mean the cost of living crisis will ease.

Falling inflation does not necessarily mean falling prices (image: AFP/Getty Images)

Professor David McMillan, a finance expert from the University of Stirling, told NationalWorld that this is because of how inflation is calculated.

“Inflation is measured as the change in prices between two points. There are various reasons why inflation increased through 2022, but the dominant one is the war in Ukraine,” he said. “[It] led to increases in oil and gas prices, among others. This then fed through into a whole range of other prices as they are basic commodities used throughout the economy.

“That same percentage change will not happen between 2022 and 2023 (indeed current gas prices are at the lower end of 2022 prices). As such, the rate of inflation will come down given its method of calculation. Prices will still be higher (inflation would have to be negative for prices to fall) but the rate at which they are rising is less  - that is, unless another large shock happens, such as the escalation of the war.”

The cost of living crisis is here to stay - for 2023 at least (image: Getty Images)

Professor McMillan added that the “nature” of the UK cost of living crisis will also contribute to a fall in the rate of inflation, as “people have less money to spend”. In this vein, Rishi Sunak has already contributed to a short-to-medium term fall in inflation by getting his Chancellor, Jeremy Hunt, to hike taxes in the Autumn Statement.

With all of these things in mind, Professor McMillan said we should therefore view Rishi Sunak’s pledge to halve inflation as being both “misleading” and “politically expedient” given the PM will barely have to lift a finger to achieve his aims.

Will the cost of living go down in 2023?

So, Rishi Sunak’s pledge to halve inflation is not quite the bold promise it appears to be. But will the second part of what he pledged - an easing of the cost of living crisis in 2023 - come to pass if inflation falls?

According to Professor McMillan, we can expect further hikes to interest rates, higher energy prices from April - when the energy price guarantee support becomes less generous - and a continuing fall in real-terms wages. Also, while overall inflation is coming down, food prices are still increasing.

“This means that the cost of living will continue to be squeezed,” he said, with “little relief through 2023”. In other words, you can expect the next 12 months to be just as difficult as 2022.