UK inflation could fall rapidly as energy prices drop

Andrew Bailey told the Commons Treasury committee that a fall in inflation was on the cards, after UK inflation rose to the highest levels seen in decades following the aftershock of Russia’s invasion of Ukraine.

Bailey told the committee: “The biggest single reason inflation has risen to that level is the war in Ukraine. It is also the most likely reason that we’re going to see a rapid fall in inflation in the year ahead, because we are not seeing energy prices rising further. In fact, they’re coming down.”

Despite insisting that the inflationary aftershocks of Liz Truss’s mini budget were “Pretty much gone”, Bailey did stress that: “It’s going to take some time to convince people that we’re back to normal.”

However, he insisted that a shortage of workers will still pose enormous risks amid a cost-of-living crisis.

“The major risk to inflation coming down … is the supply side, and in this country particularly the question of the shrinkage of the labour force,” he said.

The headline rate of annual inflation fell back down to 10.7% in November from a 41-year high of 11.1% October. Official figures for December, due out on Wednesday, are expected to show a further decrease, albeit a modest one, down to 10.6%. That would still leave inflation way above the BoE’s 2% target.

UK Prime Minister Rishi Sunak has promised to half inflation by the end of 2023; the Office for Budgetary Responsibility, forecast in November that inflation will fall to 4% by the end of 2023. Sunak made this pledge in his new year’s speech to the nation.