Twelve-month CPI inflation was at the MPC’s 2% target in 2024 Q3. Headline GDP growth is expected to fall back to its recent underlying pace of around ¼% per quarter in the second half of this year.

As set out in Box B, the combined effects of the measures announced in Autumn Budget 2024 are provisionally expected to boost the level of GDP by around ¾% at their peak in a year’s time, relative to the August Monetary Policy Report projections. The Budget is provisionally expected to boost CPI inflation by just under ½ of a percentage point at the peak, reflecting both the indirect effects of the smaller margin of excess supply and direct impacts from the Budget measures.

In the forecast described in Section 1.2, four-quarter GDP growth is expected to pick up to almost 1¾% in the first part of the forecast period, before falling back slightly (Key judgement 1). Aggregate demand and supply are judged to be broadly in balance currently and to remain so over the coming year. A margin of economic slack is projected to emerge during 2026 in part reflecting the overall tightening in the stance of fiscal policy assumed in the Budget, and also the continued restrictive stance of monetary policy (Key judgement 2). Unemployment is expected to rise slightly in the second half of the forecast period. There remains significant uncertainty around the labour market outlook.

CPI inflation is expected to increase to around 2¾% by the second half of 2025 as weakness in energy prices falls out of the annual comparison, revealing more clearly the continuing persistence of domestic inflationary pressures. In the projection, second-round effects in domestic prices and wages are expected to take somewhat longer to unwind than they did to emerge (Key judgement 3). The margin of slack that emerges later in the forecast period is sufficient to act against those second-round effects, leading CPI inflation to fall back to around the 2% target in the medium term, conditioned on the usual 15 day average of forward interest rates. This forecast also incorporates a higher projection for import price inflation. Private sector regular AWE growth is expected to fall further and to reach around 3% by the start of 2026, remaining close to that level thereafter.

The Committee’s deliberations have been supported by the consideration of a range of cases for the state of the economy. The MPC has considered alternative cases for how the persistence of inflationary pressures may evolve (Box A). In these cases, inflationary pressures may prove to be either less persistent or more persistent than in the forecast, which is based on the second case outlined in the September MPC minutes in which a period of economic slack is required in order for pay and price-setting dynamics to normalise fully.

Box A: Alternative cases for the persistence of domestic inflationary pressures

In the forecast, conditioned on the market path for interest rates, CPI inflation is expected to rise to around 2¾% by the second half of 2025 before falling back to around the 2% target in the medium term. There are significant risks around how the economy will evolve, however, particularly around the pace at which domestic inflationary pressures will unwind.

As set out in the September MPC minutes, the Committee’s recent policy deliberations have been supported by the consideration of three cases that impact the evolution of inflation persistence. The forecast is based on the second case, in which a period of economic slack is required in order for pay and price-setting dynamics to normalise fully (Section 1.2).

To understand better some of the uncertainties around the forecast, this box explores in more detail the two other cases for how the persistence of inflationary pressures may evolve. In these cases, inflationary pressures may prove to be either less persistent or more persistent than in the forecast. The box expands on some potential economic mechanisms underpinning these cases and the evidence that could support the economy developing in line with them. It also sets out the possible monetary policy implications.

The alternative cases described in this box are not necessarily mutually exclusive. Some portion of the remaining persistence in inflation may dissipate quickly in line with the first case, while some portion of it may reflect lasting changes in the structure of the economy in line with the third case.

In the first case, the unwinding of global shocks may continue to feed through to weaker pay and price-setting dynamics, without the need for a period of economic slack.

CPI inflation has fallen sharply since 2022 as energy and food price shocks have waned and global goods price inflation has fallen back. But indirect and second-round effects of higher inflation have generated persistence in domestic inflationary pressures.

In the first case, the unwinding of the global shocks that drove up inflation and the resulting fall in headline inflation may continue to feed through to weaker pay and price-setting dynamics, without the need for a period of economic slack to emerge.

In this case, the remaining persistence in domestic inflationary pressures may simply be the result of lagged effects from the global shocks that drove up inflation. As such, persistence may dissipate as the unwinding of those global shocks, and the resulting fall in headline inflation and inflation expectations, continue to return pay and price-setting dynamics to levels consistent with the inflation target. In this case, second round effects might be expected to unwind faster than in the forecast (Section 1.2).

Several developments may be consistent with this first case arising.

There are several data developments that may be consistent with pay and price-setting dynamics normalising relatively quickly. As global shocks have unwound, world export price and producer price inflation have fallen back (Sections 2.1 and 2.4), and that has contributed to an easing in UK firms’ non-labour cost growth.

While pay growth remains elevated, there are some signs that it will normalise as the lagged effects from the global supply shocks continue to feed through. Mirroring the falls in headline inflation, many indicators of households’ and firms’ inflation expectations have normalised to around their 2010 to 2019 averages (Section 2.5). And conditions in the labour market have eased, although they appear relatively tight by historical standards (Section 2.4). One model estimated by Bank staff (Chart 2.30), which allows for quite long lags between inflation expectations and wage growth, as well as accounting for developments in productivity and labour market slack, can fully explain current wage growth. Related, evidence from the DMP Survey suggests that, on average, firms tend to set wages less frequently than prices, which could be consistent with there being some lags in the pass-through of recent developments to wage growth.

Some developments in firms’ price-setting behaviour appear consistent with inflationary pressures continuing to dissipate as wage pressures ease. As described in Section 2.5 for example, intelligence from the Bank’s Agents suggests that companies’ margins are likely to remain compressed in coming quarters. Price pressures also appear to be fading more quickly than businesses had expected a year ago. Firms’ own price inflation, as reported in the Bank’s DMP Survey, has on average been 0.6 percentage points lower over 2024 than they expected a year previously.

In the third case, the economy may have been subject to structural shifts in wage and price-setting behaviour following the major supply shocks experienced over recent years.

In the third case, there is a risk that the economy has been subject to lasting changes in wage and price-setting following the major supply shocks experienced over recent years. These changes in wage and price-setting behaviour may lead to a more lasting rise in inflation persistence.

One mechanism that could cause this to arise is if some domestic firms and employees continue to seek higher nominal selling prices and higher pay to recover any reductions in real income that they have experienced in the past. Analysis by Bank staff suggests that, while real incomes have risen on average since 2019 (Section 2.3), workers in some sectors, and in some parts of the wage distribution, have experienced a reduction in real incomes relative to others over that period. At present, for example, the dispersion in real wage growth experienced since 2019 Q4 across sectors is greater than seen over the same time span prior to the pandemic. And wage growth in the lower deciles of the income distribution has outpaced that of other deciles, in part due to the notable rises in the National Living Wage (NLW) (Section 2.5). If workers seek to re-establish previous pay differentials, that could result in more persistent strength in wage growth.

If this mechanism were at play, it would result in a stronger outlook for wage growth for any given level of unemployment. This could be broadly equivalent to a further shift up in the medium-term equilibrium rate of unemployment, resulting in a reduction in the potential growth rate of supply relative to the forecast.

Employers are more likely to re-establish pay differentials if the labour market remains relatively tight. As outlined in Box F, contacts of the Bank’s Agents who expect higher wages and prices to persist for longer cited the possible role of factors such as Covid and Brexit in lowering labour supply. Alongside labour market tightness, firms’ ability to raise prices in order to preserve their margins will depend on the strength in demand (Section 2.5).

A range of developments may support this third case materialising.

There are some signs in the data that, were they to continue, may be consistent with this case. While annual CPI inflation has fallen below the MPC’s 2% target, wages and services price inflation remain elevated (Section 2.5). And, although both of these are expected to moderate gradually in the forecast, some indicators suggest that the pace of normalisation may have slowed. Firms’ year ahead expectations for wage growth reported in the Bank’s DMP Survey, for example, have remained around 4% over recent months (Chart 2.31), and analysis by Bank staff suggests that firms’ expectations are skewed to the upside of that estimate. In addition, while the labour market has eased, it appears relatively tight by historical standards, with measures such as the vacancies to unemployment ratio still slightly elevated (Chart 2.19).

As noted above, increases in the NLW will have narrowed pay differentials between those on the NLW and those paid above it. While the estimated effect of the NLW in the aggregate pay data appears to have been fairly limited so far, some contacts of the Bank’s Agents report that they are coming under pressure to maintain pay differentials between scales. Bank staff’s estimate of the effects of the 2024 NLW (Section 2.5) incorporates some degree of spillovers from this channel based on what has occurred over the past, although, given the size of the 2024 and 2025 NLW increases, there is a risk that these spillovers could be larger than in previous years.

Some aspects of firms’ price-setting behaviour may also be consistent with persistent inflationary pressures remaining. The share of prices that are changed in any given month, for example, has remained elevated (Chart 2.25). Prior to the pandemic, a broadly stable share of services prices were increased and decreased each month, but the net share of services price quotes in the CPI increasing each month rose sharply in 2022 and has remained notably high. In addition, to the extent that profit margins have fallen in recent years (Section 2.5), as relatively soft consumer demand has constrained firms’ ability to fully pass through cost rises, there is a risk that firms will seek to rebuild their margins. There is limited evidence of this occurring in the data so far, however.

Both alternative cases would necessitate different future monetary policy stances to ensure that inflation is returned sustainably to target.

If pay and price-setting dynamics were to normalise more quickly than expected, as in the first case, the lower degree of inflationary pressures would require a less restrictive future stance of monetary policy than would be implied by the forecast. And if these dynamics were subject to lasting change, as in the third case, policy would need to be somewhat more restrictive.

The MPC will continue to monitor closely the risks around inflation persistence.

The Committee will continue to monitor the accumulation of evidence from a broad range of indicators of inflation persistence, including evidence that could point to either of the alternative cases laid out in this box having begun to materialise.

Box B: Autumn Budget 2024

The Government has set out its tax and spending plans in Autumn Budget 2024, published on 30 October. This box outlines the broad composition of the fiscal measures announced in the Budget and how these have been incorporated provisionally into the MPC’s projections. The Committee will monitor the impact of the Budget, including ahead of its next forecast round in February.

The Government has adopted a new set of fiscal rules.

The Government announced new fiscal rules in Autumn Budget 2024. The Government’s updated Fiscal Mandate requires the current budget, defined as revenues minus day-to-day expenditure, to be in surplus by fiscal year 2029–30. In addition, net financial debt, as measured by public sector net financial liabilities (PSNFL), is required to be falling as a share of GDP by 2029–30. Once 2029–30 becomes the third year of the forecast, both rules will then need to be met by the third year of a rolling forecast period. The OBR has judged that, under the plans laid out in Autumn Budget 2024, the Government will meet both fiscal rules two years earlier than required. The OBR expects that the requirement for the current budget to be in surplus will be met by a margin of around £10 billion in 2029–30.

Higher expenditure is partly offset by higher taxation.

The fiscal plans outlined in Autumn Budget 2024 represent a substantial near-term loosening of fiscal policy compared with the plans outlined by the previous Government in March. Public sector net borrowing (PSNB) is now projected by the OBR to decline from 4.5% of GDP in 2024–25 to 2.1% in 2029–30 (left-hand panel of Chart A). Relative to the OBR’s March forecast, PSNB is projected to be around 1 percentage point higher as a share of GDP on average over the next three years, equivalent to around £30 billion per year (right-hand panel of Chart A). The effects of new policy announcements raise government expenditure on average by around £70 billion per year from 2025–26 onwards compared with the OBR’s March projections, of which two thirds is accounted for by higher current expenditure (pink bars) and one third by higher capital expenditure (green bars). Higher expenditure is partly offset by taxation measures which, relative to previous plans, are projected to raise receipts by an average of £36 billion per year from 2025–26 onwards (blue bars).

Chart A: Public sector net borrowing is projected to be higher than under the OBR’s March projections

Public sector net borrowing (PSNB), as a percentage of GDP (left panel) and contributions to change in the OBR’s PSNB projection between March 2024 and October 2024 (right panel) ^(a)

Footnotes

• Sources: OBR and Bank calculations.
• (a) Projections are based on OBR forecasts. Indirect effects capture the OBR’s estimate of the change in borrowing resulting from measures-induced changes to macroeconomic variables or tax-bases.

The largest change to taxation was an increase in employer National Insurance contributions (NICs), which is forecast to raise £26 billion by 2029–30. From April 2025 onwards, the NICs rate that firms pay will increase from 13.8% to 15%. And the threshold at which NICs are levied on employers will be lowered from £9,100 to £5,000. This is partially offset by an increase in the generosity of the Employment Allowance which employers can claim on their NICs liabilities. The Budget included a number of measures that raise receipts, including changes to capital gains tax and inheritance tax, reforms to the taxation of non-domiciled individuals and the introduction of VAT on private school fees.

Budget spending policies raise current expenditure by £23 billion in 2024–25 relative to the OBR’s March forecast, reflecting a combination of funding for previous spending pressures and the cost of new measures announced on 30 October. Current expenditure is then around £45 billion per annum higher over the remainder of the OBR’s five-year forecast period, relative to its March forecast. In real terms, annual departmental current expenditure growth is expected to be 5.5% and 3.5% in 2024–25 and 2025–26, respectively, after which it slows to 1.3% per annum.

Capital expenditure is also higher than assumed in the OBR’s March forecast. In real terms, capital spending is set to rise by 9.9% in 2025–26, up from 4.5% in the OBR’s March projection, before slowing across the remaining years of the forecast.

The National Living Wage will increase by 6.7% in 2025.

The Government has accepted the recommendation of the Low Pay Commission regarding the 2025 uplift for the National Living Wage (NLW). In line with this, it has announced a 6.7% increase in the NLW main rate in April 2025. That is somewhat lower than the 9.8% increase in April 2024 (Section 2.5).

Measures announced at Autumn Budget 2024 are expected to boost GDP growth over the MPC’s forecast period.

The MPC’s projections are conditioned on the Government’s tax and spending plans set out in Autumn Budget 2024. The impacts of the measures included in the Autumn Budget have been estimated using multipliers, which capture the total effect of fiscal policy changes on GDP, including via indirect effects on private incomes and spending. These fiscal multipliers vary according to the type of measure. For further details see the May 2021 Report.

The combined effects of the new measures announced in Autumn Budget 2024, including the additional funding for previous spending pressures, are provisionally expected to boost the level of GDP by around ¾% at their peak in a year’s time relative to the August Report projections. This reflects the stronger, and relatively front-loaded, paths for government consumption and investment more than offsetting the impact on growth of higher taxes.

The increase in employer NICs is assumed to lead to a small decrease in potential supply over the forecast period. That reflects an assumption that employers will pass some of the rise in NICs through to wages, which results in slightly lower labour supply through reduced labour market participation. Broader uncertainties surrounding the aggregate impacts from the NICs increase on growth and inflationary pressures in the economy are discussed in Section 1.2.

Additional public investment would, if sustained, be expected to increase the productive capacity of the economy in the long run. The impact on potential supply of the public investment announced in the Budget is provisionally expected to be very small over the MPC’s forecast period, and to build thereafter. Overall, the changes announced in the Budget are expected to reduce the margin of spare capacity in the economy over the MPC’s forecast period.

The combined effects of the measures included in the Budget are provisionally expected to boost CPI inflation by just under ½ of a percentage point at their peak relative to the projection in the August Report (Chart B). In the near term, the direct effects of the rise in the cap on single bus fares from £2 to £3 and the introduction of VAT on private school fees from January, and the increase in Vehicle Excise Duty from April, push up the MPC’s projection for CPI inflation from 2025 Q1 and Q2 (purple bars). The increase in employer NICs is also assumed to have a small upward impact on inflation. These effects are partly offset by the 5p cut and extension of the freeze in fuel duty rates from March and April 2025, respectively (orange bars). Further out, the 5p cut is assumed to expire and fuel duty is assumed to rise in line with RPI inflation from 2026 Q2, such that it pushes up the MPC’s CPI inflation projection in the year from that point. The assumed reduction in excess supply due to the Budget also raises the projection for CPI inflation (aqua bars).

Chart B: Policies included in the Budget are expected to raise CPI inflation by just under ½ of a percentage point at their peak

Impact of Budget on CPI inflation forecast ^(a)

Footnotes

• (a) The ‘other Budget effects’ bars account for the effects of the rise in the cap on single bus fares, the rise in vehicle excise duty, the introduction of VAT on private school fees and Bank staff’s estimates for the CPI impact of the change in employer NICs. The ‘fuel duty’ bars account for the extension of the freeze and the 5p cut to fuel duty rates, followed by the assumption that the 5p cut will expire and fuel duty will rise in line with RPI from 2026 Q2. The ‘spare capacity’ bars capture the impact on inflation of changes to excess supply as a result of fiscal policy.

Box C: Monetary policy since the August 2024 Report

At its meeting ending on 18 September 2024, the MPC voted by a majority of 8–1 to maintain Bank Rate at 5%. One member preferred to reduce Bank Rate by 0.25 percentage points, to 4.75%. The Committee voted unanimously to reduce the stock of UK government bond purchases held for monetary policy purposes, and financed by the issuance of central bank reserves, by £100 billion over the next 12 months, to a total of £558 billion.

Monetary policy decisions had been guided by the need to squeeze persistent inflationary pressures out of the system so as to return CPI inflation to the 2% target both in a timely manner and on a lasting basis. Policy had been acting to ensure that inflation expectations remained well anchored. As set out at the time of the August Monetary Policy Report, the Committee’s deliberations had been supported by the consideration of a range of cases, to which different probabilities and different risks could be attached.

In the first case, the unwinding of the global shocks that drove up inflation and the resulting fall in headline inflation should continue to feed through to weaker pay and price-setting dynamics. The persistence of inflationary pressures would therefore dissipate with a less restrictive stance of monetary policy than in other cases.

In the second case, a period of economic slack, in which GDP fell below potential and the labour market eased further, might be required in order for pay and price-setting dynamics to normalise fully. Domestic inflationary persistence would then be expected to fade away, owing to the opening up of slack from a more restrictive stance of monetary policy relative to the first case.

In the third case, the economy might be subject to structural shifts such as changes in wage and price-setting following the major supply shocks that had been experienced over recent years. The degree of restrictiveness of monetary policy might be less than embodied in the Committee’s latest assessment, meaning that monetary policy would have to remain tighter for longer.

Since the MPC’s August meeting, global activity growth had continued at a steady pace, although some data outturns suggested greater uncertainty around the near-term outlook. Oil prices had fallen back, reflecting in large part weaker demand. Market-implied paths for policy rates across major advanced economies had declined.

There had generally been limited news in UK economic indicators relative to the Committee’s expectations in the August Monetary Policy Report. Headline GDP growth was expected to return to its underlying pace of around 0.3% per quarter in the second half of the year. Twelve-month CPI inflation had been 2.2% in August, and was expected to increase to around 2½% towards the end of this year as declines in energy prices last year fell out of the annual comparison. Services consumer price inflation had remained elevated at 5.6% in August. Private sector regular average weekly earnings growth had declined to 4.9% in the three months to July.

In the absence of material developments, a gradual approach to removing policy restraint remained appropriate. Monetary policy would need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term had dissipated further. The Committee continued to monitor closely the risks of inflation persistence and would decide the appropriate degree of monetary policy restrictiveness at each meeting.

Global GDP continues to grow steadily at rates a little below pre-Covid averages. Headline consumer price inflation has fallen across advanced economies over the past two years, with services inflation and wage growth still elevated but slowly moderating. The market-implied paths for interest rates on which the November forecast is conditioned are consistent with a faster near-term pace of cuts across advanced economies than was the case three months ago.

UK GDP grew by 0.5% in 2024 Q2, slightly below expectations in the August Report. Underlying momentum in demand is judged to be a little weaker than this, at around ¼% per quarter. GDP growth is projected to have slowed somewhat in the second half of 2024 to around that underlying rate, consistent with the steer from a range of business surveys.

The labour market has continued to ease but appears relatively tight by historical standards. Large uncertainties remain around the LFS labour market statistics. Bank staff’s indicator-based models suggest that employment growth has remained positive, while unemployment has been roughly flat. Aggregate demand and supply in the economy appear to remain broadly in balance.

CPI inflation has fallen since the August Report and was 1.7% in September, slightly below the MPC’s 2% target. Goods price inflation has been muted, reflecting past declines in external cost pressures. Services price inflation remains elevated but was lower than expected in the August Report at 4.9% in September. Headline CPI inflation is projected to rise to 2.5% by the end of the year, as the drag on annual inflation from lower domestic energy bills wanes, before rising somewhat further over 2025 (Section 1).

Annual private sector regular average weekly earnings (AWE) growth has fallen back but remained elevated at 4.8% in the three months to August. Annual private sector wage inflation is expected to slow further in 2025.