University tuition fee hike to prop up high inflation
A rise in university tuition fees and volatile airfare prices are expected to prop up price growth as economists are pencilling in slightly lower inflation in October than in the previous month.
Economists polled by Bloomberg said they expected consumer price index (CPI) inflation to reach 3.6 per cent in fresh data to be released this Wednesday.
City analysts predicted slightly lower levels of core inflation, which excludes volatile measures such as food and energy, while some economists said services inflation could ease.
CPI inflation of 3.6 per cent would come in below levels seen for September, which came in lower than expected at 3.8 per cent.
In the eyes of some more cautious Bank of England policymakers, it would still be seen as being too high in light of the two per cent inflation target.
James Moberly, a UK economist at Goldman Sachs, said food inflation was expected to drop slightly after a British Retail Consortium survey suggested prices were rising at a softer pace than expected.
Moberly also said the annual increase in university fees would contribute to keeping inflation levels high.
“The increase for domestic students should be larger than last year, as the maximum tuition fee rose by 3.1 per cent, versus a freeze in 2024,” he said.
“We also expect a rebound in some volatile components in the cultural services category – live music and theatre tickets – that saw a drop in September.
“At the same time, we think that the annual rate of airfares inflation should drop given that October 2024 saw the largest price increase in October since monthly collection began in 2001.”
Goldman Sachs’ view on university tuition fees was backed by Deutsche Bank economist Sanjay Raja, though Raja warned that airfares could rise higher than expected.
Budget to warrant inflation forecast revision
A weaker reading on inflation could prompt more investors to hedge their bets on an interest rate cut this December after Bank Governor Andrew Bailey said he needed more data to push him to vote for a cut.
But the Monetary Policy Committee (MPC)’s will also largely hinge on Rachel Reeves’ Budget announcements and the effect tax increases may have on inflation.
Since the Financial Times reported that income tax hike plans were ditched, economists have signalled that Budget measures may lower inflation less than expected.
“Reading between the lines, it seems to us that Reeves plans to aim for lower headroom—£15bn, rather than the £20bn we assumed—and smaller giveaways in order to avoid raising income taxes,” Pantheon Macroeconomic economists Rob Wood and Elliott Jordan-Doak said.
“Some repricing of UK fiscal risks and the MPC outlook is warranted, as the Budget now looks less disinflationary than priced in.
“More back-loaded and smaller tax hikes would reduce the inflation drag from the Budget and push more of that drag beyond the MPC’s forecast window.”