Inflation rises, economic uncertainty grows, and Starmer heads to the U.S.

The Chancellor, Rachel Reeves, is facing renewed pressures from the UK economy. This week, it was announced that inflation unexpectedly rose to 3% in January, up from 2.5% the previous month. The increase, driven by rising transport and food costs and the introduction of VAT on private school fees, has added to the financial strain on households already contending with elevated energy bills and higher housing costs.  

Wage increases have also risen to their highest level in three years, adding to concerns that this could dissuade the Bank of England from delivering the interest rate cuts many had hoped for in the coming months. Meanwhile, sluggish GDP growth and tax increases have dampened consumer spending, raising fresh nervousness about the state of the economy. 

The Bank of England, however, is unlikely to shift its stance on interest rates despite recent inflation numbers exceeding expectations. Policymakers believe that inflation is in a "hump" and will eventually fall back towards the 2% target. The latest increase was partly driven by an erratic comparison with airfares from last year and a VAT hike on private school fees - factors the Bank is likely to look past. Core CPI inflation, which excludes volatile food and energy prices, rose from 3.2% to 3.7%, aligning with some forecasts, while services inflation, a key indicator of domestic price pressures, was slightly below expectations at 5%. 

As these domestic issues unfold, Prime Minister Keir Starmer is set to visit the United States next week for high-level talks with President Trump and other senior officials. This visit comes at a crucial time for the security of Europe, with Sir Keir eager to show the new US President that the UK is willing and able to meet demands of future defence spending, as my colleague Fraser Raleigh discussed earlier this week. 

As Starmer seeks to discuss plans for ending the war with President Trump, the link between inflation and the UK’s reliance on foreign energy and technology will surely be on Starmer’s mind. The lingering effects of global instability amplify inflationary pressures. While the shocks facing the UK economy are smaller than in 2022, when Russia's invasion of Ukraine forced the Bank of England to abandon its "transitory" inflation forecasts, they still pose significant challenges. 

While conditions are somewhat stabilised,  the UK is still vulnerable. Energy bills are expected to rise further, mainly due to a colder-than-expected winter in Europe, which is pushing up heating and power costs. Additionally, food prices remain upward, contributing to renewed inflationary pressure on households already squeezed by previous price hikes. As these factors continue to exert influence, the reliance on foreign sources for energy and key technology inputs has further highlighted the need for a more self-reliant approach. 

As the government has repeatedly emphasised, transitioning to homegrown energy solutions such as wind and solar is crucial for stabilising domestic energy prices and safeguarding the economy from global shocks. The government is steadfast in its commitment to domestic renewable energy supplies, prioritising national needs over local opposition, as demonstrated by the recent approval of the West Burton Solar Farm and Heckington Fen Solar Park NSIPs (Nationally Significant Infrastructure Projects).  

The coming weeks will be pivotal as the UK navigates economic and diplomatic challenges. Inflation concerns at home and the outcomes of Starmer’s U.S. visit will set the tone for the financial strategy going forward.