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OPINION: "The risk of an inflation shock is also increasing"

OPINION:

Wednesday 24 January 2024

OPINION: "The risk of an inflation shock is also increasing"

Wednesday 24 January 2024


Guernsey's rate of inflation fell to 6.3% at the end of 2023.

The IoD's lead on economics, Richard Hemans, has provided Express with the following analysis:

"The latest inflation bulletin is on balance positive, although the headline rate remains elevated. RPI continues to moderate, falling by 2.2% versus December 2022 and 0.7% from September 2023. Inflation has been decreasing for four consecutive quarters now since it peaked at 8.5% in December 2022.

"The quarterly increase of 0.8% is the softest reading since September 2021 and core inflation, excluding food and energy, decreased to 5.3% from 6.1%. The island’s RPI is likely to remain below Jersey’s, which is not published until Friday 26 January 2024, but now sits higher than the UK’s, which was 5.2% at the end of December 2023.

"Housing and Food continued to be the most significant contributors to annual inflation, whilst Household Services (communications, cleaning etc) and Leisure Services (entertainment, holidays etc.) were also important factors. Housing costs increased by 11.8% and Food by 6.9%, contributing 2.0% and 0.9% respectively, or nearly half of the 6.3% RPI figure.

"Household services increased by 7.5% and Leisure services by 8.1%, contributing 0.9% and 0.8% respectively. Most of these increases have been driven by rising interest rates and strong post-pandemic labour markets. Except for Housing, the quarterly RPI figures suggest inflation is easing in these categories and the likely downward path for interest rates in 2024 suggests the pressure on the housing element of RPI will also relent.

"The most recent States of Guernsey forecast indicates that inflation will fall below 5% by the end of September 2024, which seems realistic given today’s figures, but remains very high compared to historical data and standard targets of 2% for many major economies. The risk of an inflation shock is also increasing with geopolitical tensions in the Middle East that could  lead to rising energy costs.

"However, interest rates are likely to have peaked and food inflation is still falling, which should drive inflation lower in 2024. Real earnings will remain positive as the strong labour market means pay will increase above inflation, but businesses will remain under pressure from rising costs, particularly labour. The States of Guernsey’s new P&R Committee is right to renew focus on improving the affordability and availability of housing in the island. This will not only help to reduce inflation, but it will also improve the island’s social equality and productivity."

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