Market News

Rachel Reeves has repeatedly promised to protect “the payslips of working people”.

But now it is precisely those households who will pay the price for the Chancellor’s botched handling of the economy.

As inflation remains stuck at 3.8pc, its highest level in 19 months, families are battling rising food prices and are braced for mortgage rates to stay higher for longer.

And that is before a further round of tax rises expected in November’s Budget, as Reeves prepares to plug a hole in the public finances that could be as high as £50bn.

The economic problems created by Reeves were laid bare by the Office for National Statistics on Wednesday.

According to its latest figures, inflation was stuck at 3.8pc in the year to August, nearly twice the Bank of England’s 2pc target and by far the highest in the G7.

This troubling economic outlook is causing increasing concern for analysts, many of whom fear that prices will continue to rise in the coming months.

“The inflation picture is increasingly ugly here in the UK and, sadly, things may get worse before they get better,” says Zara Nokes at JP Morgan Asset Management.

Bank poised to hold rates

The warning comes as traders slashed the chance of a Bank of England rate cut on Thursday to virtually zero.

Markets are betting the Bank will forego another opportunity to cut rates in November just before the Budget, while also holding steady at 4pc until April next year.

Officials on the Monetary Policy Committee (MPC) expect inflation to fall, but are too fearful to reduce borrowing costs when inflation is so high.

The consequence of this is clear for homeowners.

As cheap mortgages expire and households refinance with more expensive loans, their living costs will keep rising – despite the Bank having reduced its base rate from the peak of 5.25pc last year.

According to the latest figures, the average monthly mortgage payment rose above £1,000 in the summer for the first time.

For markets and the MPC alike, one of their main concerns regarding inflation is food prices – which are rising at the fastest pace since January 2024.

Retailers have recently made clear that this is self-inflicted, owing to the Chancellor’s National Insurance tax raid in her last autumn Budget.

The threat of further tax rises has recently led to a string of retail bosses warning Reeves against targeting supermarkets further.

This week, Giles Hurley, Aldi’s UK chief, pleaded with the Chancellor to think “very, very carefully” about raising business taxes further in the Autumn, as he fears they “could find their way into the food sector”.

The ONS said food prices rose by 5.1pc in the year to August, accelerating from 4.9pc in July. The increase was driven by higher costs of vegetables, milk, cheese, eggs and fish.

Food inflation has risen every month since Reeves’s employer tax raid took effect in April, alongside another big inflation-busting jump in the minimum wage. The British Retail Consortium predicts food inflation will hit 6pc in the coming months.

Food and energy bills are particularly important for the MPC.

As costs that are regularly paid by households, the Bank’s rate-setters fear sharply rising supermarket bills will prompt workers to demand higher wages – risking another inflationary spiral that requires action in the form of interest rate rises.

This makes the Chancellor’s Budget all the more vital when it comes to who she targets with tax rises.

Reeves has vowed to leave income tax rates, VAT and employee National Insurance contributions untouched – leaving few good options for finding tens of billions of spare cash.

This is making food producers fearful that they could again become the target of tax increases, forcing another round of price rises on top of those already prompted by Reeves’s existing policies.

“She must resist bringing in new costs to ensure the UK is an attractive place to invest,” warned Karen Betts, the chief executive of the Food and Drink Federation.

“There are still notable pressures on coffee, cocoa, olive oil and dairy prices, but otherwise the continued rise is explained by regulatory and tax costs.

“This year’s increases to employer National Insurance contributions, the new packaging tax, business rates rises and the cost of border checks including to Northern Ireland are heaping costs on our sector.”

The strain of rising costs in supermarkets is hitting poorer families the hardest, the Resolution Foundation think tank also warned.

“The Chancellor should look to ease the cost of living pressures on struggling families at the Budget in November,” says James Smith, from the Resolution Foundation.

It follows figures showing pay rises for workers are starting to slow, creating further chaos in the jobs market – where redundancies are creeping up and unemployment is at a four-year high.

However, economists warned that the Bank must see further cooling in the market before it can comfortably cut rates further from 4pc.

“While wage growth has fallen in recent months, more progress is required on the inflation front to convince the Bank’s policymakers that a further rate cut is possible in the current economic environment,” says Scott Gardner, from Nutmeg.

“A fourth rate cut in 2025 will require further labour market weakness, a somewhat pyrrhic victory.”

So far, the Chancellor has claimed credit for the Bank of England’s recent rate cuts, even as her own policies have driven up inflation and prevented further reductions in borrowing costs.

However, it appears that even this small sliver of success has now been extinguished – as borrowing costs are set to remain on hold for months to come.