Winter inflation warning places Reeves’s financial progress plan in danger

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Your help makes all of the distinction. Learn extra Rachel Reeves has been given an inflation warning by the Financial institution of England, because it minimize rates of interest to their lowest degree in two years however forecast months of sharp worth rises pushed by increased meals costs.

Days after the chancellor was warned of a £50bn black gap within the authorities’s funds, the Financial institution mentioned Ms Reeves’s nationwide insurance coverage hike and the rise within the minimal wage have been serving to to push up the price of the grocery store store.

There was aid for debtors, because the rate of interest was minimize to 4 per cent.

However the Financial institution mentioned headline inflation would speed up to 4 per cent by September, whereas inflation on meals is ready to hit 5.5 per cent between now and Christmas – placing a squeeze on family budgets.

<img src="https://static.independent.co.uk/2025/07/15/08/60b43eae12ab36690af19d3fa9a822c8Y29udGVudHNlYXJjaGFwaSwxNzUyNjQ5NzM2-2.80995116.jpg" srcset="https://static.independent.co.uk/2025/07/15/08/60b43eae12ab36690af19d3fa9a822c8Y29udGVudHNlYXJjaGFwaSwxNzUyNjQ5NzM2-2.80995116.jpg?quality=75&width=320&auto=webp 320w, https://static.independent.co.uk/2025/07/15/08/60b43eae12ab36690af19d3fa9a822c8Y29udGVudHNlYXJjaGFwaSwxNzUyNjQ5NzM2-2.80995116.jpg?quality=75&width=640&auto=webp 640w" loading="lazy" alt="Chancellor Rachel Reeves has welcomed the rate cut" class="sc-1mc30lb-0 ggpMaE inline-gallery-btn"/> open picture in gallery

Chancellor Rachel Reeves has welcomed the speed minimize (PA) Consequently, the Financial institution’s governor, Andrew Bailey, signalled that rates of interest would fall extra slowly in coming months, saying they have been “nonetheless on a downward path” however that modifications must be “made regularly and punctiliously”.

Amid fears that the speed minimize might stoke inflation, the Financial institution’s Financial Coverage Committee was break up and was compelled to take a second vote for the primary time in its historical past as a way to break the impasse.

The forecasts pile extra strain on the chancellor, lower than 24 hours after Sir Keir Starmer pledged that this autumn’s Finances will be certain that “folks really feel higher off”.

Ms Reeves welcomed the speed minimize, saying it could assist to “convey down the price of mortgages and loans for households and companies”.

However she additionally left the door open to tax hikes within the Finances, after main economists mentioned she might have to lift levies, minimize public spending, or tear up her fiscal guidelines as a way to fill a multibillion-pound black gap.

She additionally got here below strain from former Labour prime minister Gordon Brown, who instructed rising playing taxes to fund the abolition of the two-child profit cap and taking defence spending out of her borrowing guidelines to unencumber financial “headroom”.

However the Tories mentioned the nationwide insurance coverage rise coupled with “reckless borrowing” had “pushed inflation effectively above goal”.

<img src="https://static.independent.co.uk/2025/08/07/6/26/Starmer-defends-Palestine-recognition-plan-zl6lgmfi.jpeg" srcset="https://static.independent.co.uk/2025/08/07/6/26/Starmer-defends-Palestine-recognition-plan-zl6lgmfi.jpeg?quality=75&width=320&auto=webp 320w, https://static.independent.co.uk/2025/08/07/6/26/Starmer-defends-Palestine-recognition-plan-zl6lgmfi.jpeg?quality=75&width=640&auto=webp 640w" loading="lazy" alt="Keir Starmer has said that the Budget in October will ‘focus very much on living standards’" class="sc-1mc30lb-0 ggpMaE inline-gallery-btn"/> open picture in gallery

Keir Starmer has mentioned that the Finances in October will ‘focus very a lot on dwelling requirements’ (PA) Alongside the announcement of a minimize in rates of interest, the Financial institution of England mentioned the chancellor’s £25bn nationwide insurance coverage raid had pushed up meals costs. Larger wage prices are contributing to meals inflation, partly due to a rise within the minimal wage and the influence of the rise in nationwide insurance coverage contributions (NICs).

A “comparatively excessive proportion of employees” in meals manufacturing and retail are paid the nationwide dwelling wage, or an quantity near it, in accordance with the Financial institution’s newest financial coverage report. The nationwide dwelling wage elevated by 6.7 per cent in April.

“Moreover, total labour prices of supermarkets are prone to have been disproportionately affected by the decrease threshold at which employers begin paying NICs, partially as a result of a comparatively excessive proportion of grocery store employees is employed part-time,” the report added.

A lot of the wage prices, together with a proportion of the price of increased NICs, have been handed on to shoppers, placing up costs by round 1 to 2 per cent, with consumers dealing with additional hikes later this yr.

The controversial determination to lift NICs has additionally “weighed on progress”, in accordance with companies, the report mentioned.

Enterprise chiefs additionally expressed concern to the Financial institution about different authorities insurance policies, together with deputy prime minister Angela Rayner’s Employment Rights Invoice.

Helen Dickinson, chief govt of the British Retail Consortium (BRC), mentioned: “Authorities coverage will add £7bn to retailer prices this yr, from increased employment prices to the introduction of a brand new packaging tax. Meals costs have already been climbing steadily, and the BRC has warned that is solely the start.

“If the autumn Finances as soon as once more lands on the shoulders of shops, then it would solely serve to fire up meals inflation, with poorer households being hit the toughest by the Treasury’s choices.”

<img src="https://static.independent.co.uk/2025/08/07/12/49/Bank-of-England-financial-stability-report-zfhhildg.jpeg" srcset="https://static.independent.co.uk/2025/08/07/12/49/Bank-of-England-financial-stability-report-zfhhildg.jpeg?quality=75&width=320&auto=webp 320w, https://static.independent.co.uk/2025/08/07/12/49/Bank-of-England-financial-stability-report-zfhhildg.jpeg?quality=75&width=640&auto=webp 640w" loading="lazy" alt="Andrew Bailey, the governor of the Bank of England, has signalled that interest rates will fall more slowly in the coming months" class="sc-1mc30lb-0 ggpMaE inline-gallery-btn"/> open picture in gallery

Andrew Bailey, the governor of the Financial institution of England, has signalled that rates of interest will fall extra slowly within the coming months (PA) James Smith, of the Decision Basis financial suppose tank, mentioned: “There was dangerous information for the chancellor from the Financial institution of England right now as its forecasts stay extra pessimistic on progress than [those of] the Workplace for Finances Duty, suggesting dangerous information is coming on the autumn Finances.

“Financial institution charge is now 4 per cent – its lowest degree since March 2023. Whereas this shall be broadly welcomed by mortgagors, round 700,000 households will nonetheless see repayments rise as they arrive off five-year fixed-rate offers.

“There was additionally dangerous information from the Financial institution of England for households combating the price of dwelling: inflation is ready to be increased than beforehand anticipated, with meals inflation rising additional within the coming months, and actual wage progress set to hit a brick wall this yr.”