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The latest bulletin shows that local inflation continues to decline slowly, but it is persistent and is now higher than both the UK and Jersey (based on the latter’s most recent figure at the end of June 2024).
Guernsey’s inflation did not reach the levels experienced by the UK and Jersey during the pandemic, but it is proving to be more stubborn in coming down and is more elevated in relation to our nearest neighbours and pre-pandemic levels.
The annual change in Guernsey’s RPI for the year was 5.1%, which was 1.9% lower than in September 2023 and 0.2% below June 2024.
UK inflation is currently being driven by petrol and travel costs, whilst in Guernsey and also Jersey it is being driven by housing costs, reflecting the imbalance of supply and demand for this critical asset. Indeed, housing contributed over a third of inflation over the last year as there were significant increases in the cost of mortgages, rents and insurance.
The other highest annual contributors to inflation were the household services, leisure services and fares categories. Combined with housing, these categories made up nearly three-quarters of the increase in RPI. It was notable, however, that three out of the fourteen categories contributed nothing to annual inflation and that they all related to goods rather than services. The biggest price increases over the last year were seen in the fares, housing and fuel categories.
Excluding food and energy, core inflation was 4.6% compared with 4.4% at the end of June 2024, which indicates that underlying inflationary pressures are increasing. It is clear that inflation is being driven by services in the island, with services inflation increasing at an annual rate of 4.1% in the latest quarter, compared with 3.8% in the previous quarter. Services inflation is closely watched because it is more persistent and reflects the domestically generated price pressures in an economy. It is clear there are capacity constraints in the island relating to housing and labour that are driving inflation.
The inflation rate of 5.1% came in above the States forecast of 4.7%, reflecting how surprisingly strong inflation is. This will likely increase the size of the fiscal deficit in 2025. Inflation was forecast to fall to 4.1% by the end of the year, which now seems unlikely. The UK is forecasting a slight increase in inflation by the end of the year due to rising energy and food costs, which suggests local inflation will stay around current levels at the end of 2024.
Inflation in Guernsey is high in relation to historic standards and higher than the UK and Jersey. This matters over the medium to long-term because it erodes our competitiveness and reduces our relative living standards. The scarcity of labour and housing puts significant upward pressure on inflation. Whilst some might argue that the island lacks the main lever to control inflation because it cannot set interest rates (Guernsey interest rates would be significantly higher than the UK right now given the relative rates of inflation), there remain many options available to control inflation, including reducing the fiscal deficit, increasing the supply of housing and policies to improve the quantity and quality of labour.
