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Sterling underwhelmed by spring statement, as CPI hits a new 30 year high

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Despite seeing another 30 year high for inflation and a spring statement that has partially undone the increase in NI rates which will kick in next month, the pound has had a pretty uneventful day, while UK gilt yields have fallen back.

Inflation in the UK hit a new 30 year high earlier today, rising to 6.2% in February, up from 5.5% in January, and looks set to go even higher over the coming months. With RPI now at 8.2% and the latest set of input prices rising to 14.7%, the odds of a double figure print for headline CPI appear to be becoming increasingly likely in the coming months, as we head into the summer months.

In further signs that inflation is becoming more embedded we’re also seeing significant increases in prices away from food and energy. Clothing and footwear prices are up 8.8% year on year, furniture and household is up 9.2%, and that’s before we get the various tax rises that are due in April.

Consumers are on the cusp of a perfect storm of price and tax increases which could have the spill over effect of a significant Q2 slowdown.

While the Bank of England adopted a dovish tone last week, it may find it has no option to tighten in line with the Federal Reserve if only to dilute the inflationary impulse of a weaker pound. 

Today’s spring statement from the Chancellor of the Exchequer did go some way to mitigating some of this, however the measures while helping to some extent, will do little to ameliorate the bulk of what’s coming our way in the coming months.

On the forecasts front the OBR cut its GDP forecast for the UK economy for this year to 3.8% from 6%, which on the face of it looks optimistic, while raising its inflation forecast for this year to 7.4%. It also cut its forecast for 2023 to 1.8%.

On the plus side, in a welcome move the Chancellor did move the threshold for National Insurance contributions in line with income tax thresholds to £12,500, a £3,000 increase from July.

He also cut fuel duty by 5p a litre until March 2023, which in all honesty is unlikely to touch the sides, given how much petrol prices have gone up at the pump in the last few weeks, although it’s better than nothing..

There was also welcome news for hospitality with a 50% discount on business rates from April.

He also announced that all energy home improvements would be VAT exempt, which while welcome rather misses the point when people are struggling to pay their bills. This giveaway requires that you have the money to spend in the first place. With energy bills set to rise by 54% in April and potentially again in October it rather misses the mark.

The most eye-catching announcement was a pledge to cut income tax to 19% by 2024, although that’s not much help to consumers right now, and more a case of jam tomorrow.

Another figure that stood out was the £83bn that the UK will spend on debt interest this year due to the rise in interest rates. That’s four times bigger than last year, and it could well go higher.

If anything, it was a bit of a hokey-cokey budget with the Chancellor putting a little bit in with one hand and taking back out with the other.

On balance however, around 70% of wage earners should find themselves better off according to Treasury estimates. Whether or not these changes keep track of the rate of inflation is another matter, and that more than anything is likely to be the key test, and here where  the Chancellor could well come unstuck.


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