We will find out soon whether Andy Burnham will face a contest for the leadership of the Labour Party or take office unopposed. Either way, it makes little difference now. One way or another, he is likely to be our next prime minister before the end of the summer.

There are some ways in which Andy Burnham will be an improvement on the outgoing Keir Starmer. He is a better communicator and more personable. As mayor of Manchester, he is untainted by the failures of the last two years and can make a fresh start. Perhaps best of all, he can get rid of the hapless Rachel Reeves as chancellor and replace her with someone less obviously out of their depth and with at least some grasp on how businesses operate and the challenges they face. Temporarily at least, this may start to lift Labour's dismal poll ratings.

There's a problem, however. Prime minister Burnham will be heading straight into a financial crisis. Britain's economic outlook keeps on getting worse and worse. At the end of last week, we learned that government borrowing in May came in way above forecast, with a 30% year-on-year rise. For the month, government spending was up by 7% year on year, while tax receipts, even with record increases, were up by just 4% (it is hard to see much sign of the “neoliberalism” Burnham complains about in those figures). Growth stagnated last month, despite all the extra spending the government has thrown at the economy. Unemployment is rising relentlessly, especially for young people, and the welfare bills are running out of control, with the number of working-age people on benefits above four million. All the warning signs for a crash are already flashing red.

Andy Burnham is only going to make things worse. It is hard to detect much in the way of a serious economic programme in the collection of soft-left soundbites that make up his standard stump speech. But insofar as he has one, it involves yet more borrowing and spending. He has promised to bring the utilities under greater state control but said nothing about how that would be paid for. He has promised to cut business rates for small companies and launch a massive programme of council-house building, without attaching any kind of a budget. And if Burnham has ever said anything about controlling public spending, especially the soaring welfare bill, he has kept it very quiet. Even if he only keeps a fraction of his spending promises, and it will be very hard to break all of them, then the deficit will keep climbing higher and higher.

Can Andy Burnham succeed as prime minister?

Even as the deficit rises, Andy Burnham has said almost nothing about how he intends to boost growth to pay for it all, nor has he made any attempt to bring business on board. Celebrity chef Tom Kerridge has backed him, but only because of his promise to reduce the rate of VAT on hospitality businesses to 10% (yet another unfunded promise). Other than that, Britain's major corporate leaders have remained silent. There is not going to be any wave of investment to welcome the new regime, nor is there likely to be any dramatic measures to encourage investment into the UK. In the background, Britain's financial position is steadily deteriorating. Very quickly, the markets are going to test the new government. Is it willing to cut welfare, or will it raise taxes to keep paying the £125 billion a year in interest on the national debt the country now has to pay? Traders will want to find out, and find out very quickly, and if the answer is no, then gilts will be sold off.

The last PM to take over from one who had been elected with a big majority was Liz Truss in 2022. We all know how that worked out – her lifespan in office was famously shorter than that of a lettuce. Burnham won't face quite the same set of challenges, nor is he likely to attempt anything as risky as the mini-budget that led to her unravelling. Even so, the British economy is in far worse condition than it was then, our debts are far higher and the bond markets already view us with suspicion. Andy Burnham will soon face the heat – and may well wilt as quickly as a lettuce.

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Chancellor Rachel Reeves looks set to follow her boss Keir Starmer out of Downing Street following the prime minister’s resignation on 22 June.

At present, Andy Burnham appears the most likely candidate to replace Starmer – though a leadership contest could still take place if any Labour MP decides to challenge him.

One contender could be Al Carns, who stepped down as armed forces minister earlier in June over criticism of Starmer’s defence investment plan. Carns told journalists at the Foreign Press Association on 23 June that he hadn’t ruled out running for prime minister.

When the prime minister changes, the chancellor usually changes too. Jeremy Hunt was the last chancellor to survive a change of prime minister, from Liz Truss to Rishi Sunak – though Truss had only appointed Hunt after dismissing her original chancellor, Kwasi Kwarteng, following the infamous ‘mini budget’ in 2022.

Prior to that, Reginald Maudling was the last chancellor to stay in the post after the prime minister left, when Sir Alec Douglas-Home entered number 10 following the resignation of Harold Macmillan in 1963.

But with Reeves tied so closely to Starmer’s policies, it seems unlikely she’ll survive the transition at the top.

“Focus has already turned to Number 11, and the identity of the new chancellor of the exchequer,” said Matthew Ryan, head of market strategy at financial services firm Ebury.

Who could be the next UK chancellor?

If Rachel Reeves does lose her position as chancellor, there are several candidates that could replace her. So who are some of the high profile contenders?

Wes Streeting

Wes Streeting is one of the names at the top of this list. Prior to Starmer’s resignation he appeared to be a potential candidate for the top job, but immediately after Starmer resigned on 22 June, Streeting announced that he wouldn’t challenge Burnham for the position.

“Of the potential candidates, we view Streeting as the most bullish outcome for the pound, given his centre-left pragmatism and apparent aversion to aggressive tax-and-spend policies,” said Ryan.

Susannah Streeter, chief investment strategist, remarked that Streeting appears to be the front-runner for the position on the assumption that Reeves would be “ousted”.

“From any new chancellor, financial markets would initially be looking for stability and signs of action aimed at stimulating sustainable growth, and Streeting [would be] likely to initially try to project reassurance and a business as usual attitude aimed at reassuring investors and keeping a lid on high government borrowing costs,” said Streeter.

Streeting was previously secretary of state for health and social care, before resigning from the position in May.

Ed Miliband

Currently secretary of state for energy security and net zero, Ed Miliband is another possible contender for number 11 in a post-Starmer administration.

“Miliband’s position on the soft left might raise the possibility of more spending and borrowing,” said Sarah Coles, head of personal finance at investing platform AJ Bell. “However, his experience in senior roles, including as a special adviser to Gordon Brown, may lie behind reports it was Miliband who helped persuade Burnham of the importance of sticking with the fiscal rules in order to calm the markets.”

Coles suggests that Miliband might turn to progressive taxes, or reviewing tax cuts that mostly benefit higher earners, in order to balance the government’s books.

“He has previously supported a mansion tax. He might also consider more environmental taxes,” said Coles.

Coles added that Miliband’s association with net zero could reduce his chances of landing the role given opposition from some business leaders and trade unions.

Shabana Mahmood

Another option, though one whose agenda as chancellor is harder to predict, is current home secretary Shabana Mahmood.

“Mahmood has not spoken out on economic issues since her time in the shadow Treasury, so assessing a potential approach relies on extrapolating from her position as home secretary,” said Coles.

“She is considered to be measured, pragmatic and disciplined over budgets. If this is carried through into economic policy, it could mean steering clear of radical changes and opting for incremental improvements.

“The fiscal responsibility may go down well with markets, which had been worried about borrowing and spending under Burnham.

This could clash with a desire on Burnham’s part to draw a line in the sand between the Starmer government.

“More recent reports suggest Mahmood is less of a front-runner for the role than originally thought,” said Coles.

Yvette Cooper

Foreign secretary Yvette Cooper could also be a contender for chancellor, and might be well-received by markets, according to AJ Bell’s head of financial analysis Danni Hewson.

“Yvette Cooper is likely to be considered a safe pair of hands, having deftly jumped from domestic to global affairs of state as part of Starmer’s cabinet,” said Hewson. “She also spent time in the Treasury under Gordon Brown and is considered to be something of a centrist, which could reassure markets nervous about an Andy Burnham premiership that starts with pledges to turn on the spending taps."

Adding to the possible appeal of Cooper is the fact that, as a northern MP, she has a good working relationship with Burnham.

“Her breadth of experience means that she will understand the pressures on the public purse better than many and her seniority could help bring together different factions of the party under a new leader,” said Hewson.

Could Rachel Reeves play a role in the next government?

While it is unusual for senior ministers to accept demotions, the BBC has reported that sources close to Andy Burnham suggest she could do so, and take up a more junior ministerial role in a Burnham government.

Either way, Reeves is backing Burnham to be prime minister. She told the British Chambers of Commerce annual conference on 25 June that Burnham was committed to following the same fiscal rules that guided her term as chancellor.

“Andy has been really explicit - he backs those fiscal rules,” said Reeves.

“He is a great communicator, he's got a great track record of delivering in Greater Manchester, and I have no doubt he will bring that to the position of prime minister.”

Speculation has ramped up about who will be the next UK prime minister after Sir Keir Starmer kicked off a Labour leadership election by resigning on Monday (23 June).

Nominations will open on 9 July and end by the summer recess on 16 July.

The next prime minister may have different priorities to the current government, which has been working on several tax shake-ups including the mansion tax, cash ISA reforms and changes to pensions and inheritance tax rules.

New Labour MP and former Greater Manchester mayor Andy Burnham is the only candidate to have put his name forward so far, as many expected following his by-election win last week.

Maike Currie, vice president of personal finance at PensionBee, said: “The Labour leadership contest will dominate the summer, with a new prime minister expected to take office when Parliament returns in September. Investors will be looking for a clear handover, a credible economic team and an early commitment to fiscal discipline.”

Who will replace Keir Starmer?

Burnham is the only name officially in the ring so far to become the next prime minister.

He has also been backed by former health secretary Wes Streeting, who was seen as a potential candidate.

No other Labour MPs have confirmed that they will run for the leadership role yet.

Burnham hasn’t confirmed what his policies will be, although he may have to stick to manifesto commitments to not raise income tax, VAT or national insurance.

He has previously backed reforming council tax and stamp duty.

Inheritance tax changes could also be a possibility. As health secretary in 2009, Burnham suggested a flat 10% charge applied to all estates, with the money being used to fund social care for all.

More recently, on BBC Question Time in June, he said he would look at raising the personal tax allowance and also said there was “definitely a case” for the return of a 50% top rate of tax for the wealthiest.

Matthew Ryan, head of market strategy at global financial services firm and FX specialists Ebury, said: "Burnham sits firmly to the left of the Labour Party, and his record as mayor points to a significant step-up in public spending, a higher tax burden and greater gilt issuance.

“This is an experiment that the UK can ill-afford. Debt is at its highest relative to GDP since the 1960s, growth is weak, debt-servicing costs are already vast and the limited fiscal headroom leaves almost no room to manoeuvre, risking a self-reinforcing borrowing and growth trap.”

Susannah Streeter, chief investment strategist for Wealth Club, added that Burnham has tried to reassure markets by signalling that he will largely stick to fiscal rules and take a more cautious approach to spending.

She said: “He appears willing to tackle the UK's large benefits bill, arguing that welfare reform should focus on helping more people into work. Investors will also be scrutinising how Burnham's interventionist instincts translate into national economic policy. He has argued that the government should play a more active role in shaping economic outcomes, particularly through greater investment in regions outside London and the South East.

“He is also expected to push for further devolution of economic powers and has indicated support for a stronger public role in key sectors and infrastructure. However, concerns are bubbling that greater state involvement could deter private investment if it creates additional costs or regulatory burdens.”

Local supporters suggest the regeneration he has brought to Greater Manchester could be replicated nationally.

Property developer Mike Ingall, chief executive of Allied London, who has worked with Burnham on developments in Manchester including the technology and media campus Campfield, said: “He understands investment and that is the only way to get growth rather than just tax and spend.”

There have been rumours in the past that former deputy prime minister Angela Rayner could stand.

Rayner also sits on the left of the party.

Who could be in the new cabinet?

The prime minister is just one role that is likely to be up for grabs in July.

Whoever becomes the next Labour leader and prime minister is likely to want to appoint their own ministers and there are rumours that chancellor Rachel Reeves could be replaced.

Rob Morgan, chief investment analyst at Charles Stanley Direct, said: “Until we know more about the composition of the cabinet and likely policy direction it is hard to draw any firm conclusions from the soundbites heard so far. However, bolder moves on taxation certainly appear to be a possibility, so it’s a time for anyone planning their finances to be on high alert for changes.

“Already the Budget in the autumn looms large as a potentially highly consequential event. Yet given we don't even know the identity of the chancellor at this stage we can make no conclusions.”

Currie said a chancellor with a reputation for fiscal discipline could reassure markets but warned: “A more interventionist appointment, or a candidate perceived to be less disciplined with spending could have the opposite effect.”

Morgan added that there is some comfort in the fact that marked changes to taxation or other policies affecting personal finances rarely happen overnight and usually come with a long lead in time.

He said: “So while vigilance is essential there is likely plenty of time to assess any consequences, good or bad, that fall out of a change of political leadership.”

This year marks the tenth anniversary of an event that has proved to be of huge consequence for the UK stock market. No, not the Brexit referendum – 2016 was the year in which Japanese company SoftBank, led by founder and chief executive Masayoshi Son, acquired the UK's leading technology company, Arm, for £24 billion. Unlike American investors, professional UK fund managers became permanently disillusioned with the technology sector as a result of the collapse of the technology, media and telecoms bubble in 2000-2002, and so were delighted to be shot of its flagship domestic representative at a 40% premium to the prevailing share price.

With the yield on ten-year gilts at historic lows below 1.5%, pension funds were desperate to ditch equities and buy even more gilts, even leveraging up in their chase of the “liability-driven investment” delusion, which was to cost them hundreds of billions six years later. New solvency rules introduced after the 2008 financial crisis required insurance companies to invest in “safer, more liquid” securities, that is, short-dated gilts. Wealth managers could crow to their clients about short-term performance.

Only one major investor vehemently disagreed; James Anderson, the then manager of Scottish Mortgage Trust, bitterly criticised the sell-out on behalf of Baillie Gifford, with a holding of more than 10%. “We found it deeply depressing that Arm's management, and particularly its chairman, were so influenced by short-term shareholders.” Anderson said it was a premature sale of the UK's leading technology and intellectual property champions, “Britain's sole serious shot at building a global tech giant”.

In September 2023, Arm again went public when SoftBank floated the company on the New York Stock Exchange at a valuation of £40 billion, while retaining 90% of the shares. Unsurprisingly, pleas to list the shares in London were shunned, though Arm remains a Cambridge-based company. Since then, the shares have multiplied more than sixfold, although they are now down 17% from their early June peak.

Had Arm listed in the UK, it would be by far the biggest company on the London Stock Exchange. London is now only the world's eighth-largest stock market, accounting for just 3.1% of the MSCI All Countries World index. It has been steadily slipping down the rankings owing to its low exposure to the technology sector, which accounts for just 1% of the FTSE 100. This compares with 8%-9% in Europe, 27% in the US (not including Alphabet and Amazon) and 37% in Asia.

Britain's technology firms are condemned to stagnation

Also easily forgotten is the 2014 sale of Britain's DeepMind, a pioneer in AI, to Google for just £400 million. In 2006, US-based Illumina bought Solexa, the UK-based inventor of gene sequencing, for £315 million. It became the key building block in Illumina's climb to a market value of more than £50 billion (although the shares have fallen by two-thirds in the last five years). These and other examples show that Britain has a good record of creating and building technology champions, but that unambitious management, combined with uninterested and short-sighted institutional investors, means that they sell out rather than scale up in the way that American giants have shown is possible.

Without the “ecosystem” that results from successful technology firms, Britain's pool of talent will go elsewhere, there will be no pool of capital looking for the next potential breakthrough, a diminishing appetite for risk and no list of success stories to inspire future entrepreneurs. The London Stock Exchange has become a value trap – a shrinking pool of reasonably managed solid businesses with mediocre prospects. Such a market can have an occasional catch-up year of outperformance, but without a cadre of proper growth firms, is condemned to an ever-shrinking share of global capitalisation. Arm's sale to SoftBank, now Japan's largest company, didn't start this process, but it marked the point at which it became irreversible.

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Few remember the pre-privatisation state of the water industry in 1989, after decades of underinvestment. The 1976 drought and consequent water restrictions exposed a shortage of water supply as reservoirs and rivers ran dry. The government's response was to build a reservoir – in the one part of Britain that did not have a shortage.

But, if a bad idea is repeated often enough, it can lead people to mistake repetition for accuracy. They subconsciously adjust their own beliefs to avoid the mental stress of questioning or disagreeing with the proposal. Creating the illusion of truth is a prime objective of modern politics. This explains the growing clamour for the renationalisation of the water companies.

The leakage of water was, unsurprisingly, a problem; much of the pipework had been laid in Victorian times and was poorly maintained. The treatment of sewage was variable; inland, with outflows into rivers, it was reasonable, although swimming in rivers was unthinkable owing to regular storm overflows. On the coast, much of the sewage was untreated; it was merely screened and then flowed into the sea through short pipelines. This meant that beaches failed to meet the quality threshold of the EU or of anyone else. This remained the practice in Scotland long after privatisation in England and Wales.

The industry badly needed investment, but couldn't compete with the demands for capital spending elsewhere in more visible areas such as schools, roads and hospitals. Privatisation would ring-fence the sector from all the other demands on government and delegate the supervision of it to an independent regulator, Ofwat, introducing the accountability the sector had previously lacked. Investment would be debt-financed, serviced from cash flows. Charges would increase at the rate of 1% over inflation each year while additional cash flow would be provided through efficiency gains.

The post-privatisation investment boom

For about ten years, it all went according to plan. Investment, which had already risen 20% in the run-up to privatisation, quickly rose from £3 billion a year to more than £5 billion. Leakage rates fell 40%, river quality improved, short sea outflows were stopped and beaches became cleaner. Then progress slowed or stopped. Ofwat decided that keeping water bills down was the top priority. This meant restricting the capital expenditure they allowed; contrary to popular misconception, companies want to invest because that entitles them to a return on capital, achieved through higher bills. Ofwat also strong-armed the companies to reduce their cost of capital as that would lower the return on capital companies would need.

The mechanism for this was the substitution of debt for equity, achieved largely through leveraged buy-outs by private equity, taken to an extreme in the case of Thames Water. Such financially dangerous restructuring was encouraged by Ofwat and seemed justified while interest rates were low. When rates rose and the refinancing of the fixed-rate borrowing of the past came into view, the leveraged companies such as Thames Water came under extreme pressure.

The improvement in productivity continued – by an estimated 64% between privatisation and 2017 compared with zero in the public sector – but price rises in real terms stopped. According to Water UK, prices fell sharply in 2000 and remained broadly the same until 2024. Unsurprisingly, investment in nominal terms stagnated, at between £4 billion and £5 billion a year. The lack of additional investment meant a failure to deal with the continuing problem of storm overflows whereby untreated sewage was discharged into the river and sea when heavy rainfall overwhelmed the treatment works. Planning authorities refused permission for new reservoirs and sewage treatment plants and local authorities wouldn't give companies access to the roads they needed to repair leaking pipes properly.

Still, publicity given to bad news shouldn't result in good news being ignored. Leakage has continued to fall and pollution performance is below or close to target in most areas; in 2020, Southern Water and South West Water were major outliers, resulting in heavy fines. Nine companies are at, or near, their government-set targets. Severn Trent' Water's 2025-2026 results show a continued fall in leakage (to 17.6%, down from 23% in five years), water quality is above the regulatory target and significant investment has been made in waste water. For all its financial problems, Thames Water also reports a steady reduction in leakage and incidences of pollution.

It is possible, although there is no evidence for it, that Ofwat's disastrous change of direction in 2000 was due to pressure from the Blair government. They certainly castigated the managements of all privatised utility companies, encouraging them to sell out to private equity. Veteran City editor Neil Collins argues, rightly, that the government should have retained a golden share in each to prevent takeovers and maintain public accountability.

Ofwat has now been abolished, water bills are to be raised sharply in real terms for the next five years and the restructuring of Thames Water's debts is awaiting government approval. Investment is being accelerated and progress is already clearly visible. The River Thames in London has just got its first designated bathing spot. The problem now is the clamour that has built up from the “progressives” for the hugely expensive folly of renationalisation.

The objective of this is neither financial nor operational, but ideological; a drive to reverse every aspect of “Thatcherism”. If the advocates succeed, the proponents have every intention of working their way down a very long list of businesses and services once in the public sector, hoping it will take a long time for the water sector to return to its pre-1989 state.

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US corporate raider Castlelake thinks it can snap up a bargain in easyJet. The soaring cost of fuel has hammered the budget airline's shares over the last few months, which have fallen from 520p at the start of the year to less than 340p a fortnight ago, before news of a potential bid emerged. But if the oil price comes back down again, as it almost certainly will when the war in Iran comes to a close, easyJet will bounce back.

We will see what happens over the next few weeks. But the bigger story is that a pattern is starting to emerge. A whole series of British companies are being targeted by corporate raiders. It is only a few weeks since it emerged that activist investor Corvex is demanding that the Premier Inn owner Whitbread find a buyer or break itself up. The car sales platform Autotrader is under attack from its investors, as is the rather larger trading platform, the London Stock Exchange. Investment company Hargreaves Lansdown has agreed to be taken over by a private equity consortium led by CV Capital. The list goes on and on. Hardly a week goes by without a well-known British company being either sold off or coming under pressure to break itself up.

Companies change hands all the time, of course. There is nothing wrong with bids and deals. It is one of the ways that companies are forced to keep delivering for shareholders and a way for assets to be reshuffled. Without them, management would become very complacent. But in the British market it is getting out of hand.

These targets not terrible companies. EasyJet may have had a difficult few months, but as anyone who has flown with the airline will know, it offers a pretty good service at fair prices. It is hard to see anything that needs to be radically fixed. Likewise, staying at a Premier Inn is hardly a deluxe experience, but it doesn't pretend otherwise. It is a reliably good-value hotel chain for anyone who happens to be travelling around the UK. Much the same could be said for Hargreaves or Autotrader. They are all reasonably well-run businesses.

Why corporate raiders may struggle

The real problem is that it has become incredibly difficult for even the best-run companies to make any money in Britain. There are three big issues. To start with, growth has stagnated. Far from turning Britain into one of the fastest-growing economies in the world, as she promised, chancellor Rachel Reeves has presided over stagnant growth, rising unemployment, a collapse in start-ups and business investment, and soaring real interest rates as the country's debt grows relentlessly less and less affordable.

Second, taxes have risen to the highest peacetime levels since World War II, with most of the burden falling on businesses. There has been a huge rise in the national insurance that companies have to pay on any staff; big rises in business rates; rising air travel duty (which has especially hit easyJet), and a rise in green levies such as the “packaging tax”. All of those have to be paid out of flat sales, regardless of whether the company is actually profitable or not. Companies have to get more and more efficient every year just to pay all the extra taxes they owe.

Finally, the government has crushed confidence. On coming into office, Reeves talked down the economy by constantly droning on about a “black hole” in the public finances that did not really exist. Ever since, there has been constant speculation about which taxes will have to go up next. And now there is a slow-motion leadership contest, fuelling yet more uncertainty about who will be in charge in a few months, and what policies might change. It is a mess. Against that backdrop, it is hard for companies to expand. Most are just hunkering down and trying to survive.

In zero-growth, high-tax Britain, it is very hard to make any money. The result? Raiders, typically based in the far richer, more dynamic US, look at the figures from a major British company and conclude that they should be doing far better. Perhaps in a country that was more pro-business, and pro-enterprise, they would do. But in Britain that has become very hard. There is very little growth, consumers don't have much spare cash to spend and rising taxes are squeezing profit margins. A whole series of companies are coming under attack and may well be broken up or sold off. But the real problem is the state of the economy. The US corporate raiders and buy-out funds will very quickly find there is not very much they can do to fix that.

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Why is minimum wage in the news?

Many people are raising fears the UK's minimum wage may now be too high. Worsening youth unemployment and Alan Milburn's landmark report on “Neets” (young people who are not in employment, education or training) have sharpened concerns that the UK's relatively generous minimum wage and the gradual levelling up of lower youth rates to match the prevailing adult rates, are damaging overall employment – particularly among young workers.

Tony Blair – whose government established the minimum wage – has argued that recent rises have created headwinds for businesses. And within Labour, according to The Guardian, a split has opened up between those who want to slow the pace and those eager to press ahead with rises and age-convergence.

How much is the minimum wage?

In April the minimum wage for all workers aged 21 and over rose 4.1% to £12.71 an hour. This rate is known as the “national living wage”. It only applies to that adult age group and its level tracks two-thirds of median earnings. The rate for 18- to 20-year-olds is lower, but jumped 8.5% to £10.85. And the rate for 16- to 17-year-olds, or for apprentices, rose 6% to £8.00. These bigger increases for younger workers are due to the government's aim of gradually levelling up the youth rates to a single adult tier – a continuation of Conservative policies. In 2016, the Tories created the new premium national living wage tier for those aged 25 and over at the rate of £7.20 per hour. Subsequent governments then cut the age requirement for that top tier, to 23 years in 2021 and then down to the current age of 21 in 2024 – all the while increasing the headline rate.

About 1.7 million people get the national living wage, or about 6% of the workforce aged 21 and over – about twice as many as when the national minimum was introduced in 1999. Among workers under 21, the proportion is far higher – at about a fifth. Since its creation under the first New Labour government, the UK's minimum wage has got dramatically higher in real (inflation-adjusted) as well as cash terms.

Isn't that a good thing?

MoneyWeek has long been in favour on the grounds that taxpayers should not subsidise corporate profits in the form of tax credits for the working poor. The higher the wages, the fewer the benefits that have to be paid out. The other main arguments in favour are ones of social justice. Income distribution has become more skewed towards the rich in recent years, increasing inequality and potentially undermining the social solidarity that makes capitalism sustainable in the long run. Proponents argue that a minimum wage can help to arrest this trend. Some economists also argue that minimum wages boost productivity, especially in the service sector, though the evidence is contested.

Does a minimum wage destroy jobs?

Above a certain point, for sure. The question is where that point lies. Orthodox economic wisdom suggests that compulsory high pay levels will destroy jobs by disincentivising firms to take on workers. But the history of minimum wages since the 1990s has been far more encouraging than that. Landmark US research on fast-food pay rates (by economists David Card and Alan Krueger in 1994) shifted the dial in terms of the academic debate: it found that a minimum wage did little to dampen employment. A raft of further studies came to similar conclusions, and by the early 2000s the literature indicated that a 1% increase in wages due to a higher minimum wage would lead to a 0.5% decline in employment. “By the late 2010s the effect had fallen to around zero,” says The Economist. The politics changed, too. As the UK's national minimum was gradually increased without causing unemployment to grow, the Conservatives dropped their initial opposition and backed the policy.

What's the issue with minimum wage now?

The core issue is that the rate has now jumped so high. The UK has leapt from being relatively cautious – in terms of the minimum-wage level as a proportion of median wage – to being the most generous of all the big economies (from 45% in 1999 to 67% now). Most of the UK's historical experience and evidence relates to a period of low interest rates, low inflation and low unemployment – and involved a minimum wage at around 45%–55% of median earnings, not 67%, the target introduced by the Tories in 2019. That jump, and today's worsening macroeconomic picture, makes it far harder to be sanguine about the wage's effect on job creation in future. At the same time, there's been a counter-revolution among economists. Several influential US studies from 2022 onwards found that higher minimum wages – a phenomenon seen across many developed economies over the past 25 years – have indeed hit job levels, and damage the employment, income and overall welfare of precisely the low-income workers they are meant to help.

What can be done?

A sensible start would be to freeze the rates for the rest of this parliament and take back control of setting the rates from the Low Pay Commission quango, says Rishi Sunak in The Times. In addition, future rises should be linked to gains in productivity – the national living wage is up by almost a third in real terms over the past decade, while productivity has only increased by 6%. That's obviously unsustainable and the latest unemployment numbers show the effect – the fall in both vacancies and payroll numbers is concentrated in retail and hospitality, which is where a third of all minimum-wage jobs are, and which account for almost half of all jobs held by the under-25s. “Shamefully, and in a reversal of the historical norm, we now have higher youth unemployment than the EU average.” And at least in part, that's because we are knowingly pricing young workers out of the labour market. Let's stop.

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Matthew Partridge: Your latest book on the UK economy, Challenging Inequalities: How We Got Stuck and Where We Go Next, is part of a wider project by the Institute for Fiscal Studies (IFS). How did it come about?

Paul Johnson: It was a very long-term project that started in 2018, and part of a detailed study of inequality. We published over 100 papers, overseen by a committee chaired by Nobel Laureate Angus Deaton. Each of the papers took a detailed look at one aspect of the theme – ethnic inequalities, for instance, or wealth inequality. The idea was to highlight key issues in something approaching a narrative. The book itself I co-authored with three or four other people.

Matthew Partridge: I noticed that you say if you look at some measures, such as the Gini coefficient, income inequality hasn't changed much since the 1990s. However, other measures, such as the income controlled by the 1% and 0.1%, have increased. Is this a fair summary?

Paul Johnson: Overall income inequality rose enormously in the 1980s, only to plateau from 1990 onwards at a population-wide level. However, while inequality across most of the population didn't change, the top 1% continued to move ahead of everyone else in terms of both income and wealth until about 2008. Since then, income inequality has fallen slightly, although it remains at a very high level by historic and international standards. What's more, while raw income inequality may have peaked, other types of inequality have become more significant, including gaps between regions and generations.

Matthew Partridge: Do you think these high level of inequality have played a big part in the move away from mainstream parties to populism?

Paul Johnson: The main cause of the move away from the centre is probably the lack of growth over the last 20 years. However, the two factors interact very strongly. So, not only are people fed up because they haven't seen their living standards rise for quite a long time, but they are also angry because some people are a lot richer than they are. Certainly, the concerns around inequality wouldn't be so pressing if everyone's incomes were still rising. You can see that with the younger generation who are no longer doing better than their parents, at a time when house prices have been increasing faster than earnings.

Matthew Partridge: One of the big themes of the book is that just trying to solve inequality through more redistribution isn't going to work. Instead, you suggest something you call “pre-distribution”. Can you elaborate on that?

Paul Johnson: We made a conscious decision that the book wasn't going to go down the traditional route of suggesting how you could tweak taxes and benefits to reduce inequality, partly because the IFS has already done a huge amount of work on that. There are ways of making tax and welfare more redistributive, but they come at the cost of weakening incentives.

Most importantly, we discovered that people place more value on money they've earned themselves and having a good job than on being given handouts. So, we need to find a way that creates the sort of economy that works better for everybody. While that's easy to say and hard to do, it leaves less to tidy up afterwards.

That's why the book focuses on things that could boost productivity growth, such as early years education, family life and housebuilding, but also the regulation of big companies. However, we also talk about things such as globalisation, free trade and immigration, which generally boost economic growth, but if you take them too far they can undermine their positive impact by increasing inequality.

Matthew Partridge: Do you think that one of the problems with immigration is that, despite the promise of points-based immigration, we've failed adequately to change our system to focus on highly skilled workers?

Paul Johnson: Immigration policy has been all over the place, and even though this government has tried to tighten the rules, there are still a lot of people coming in as family members without having to demonstrate any particular skills. While I don't like calling care workers low-skilled, a lot of people took advantage of care-worker visas. Of course, if we do restrict this type of immigration, then we're going to be paying more for these types of services. Note, too, that due to the extraordinary fall in our fertility rate from 1.8 to 1.4 over the last five years, without net migration our population would start to fall.

Matthew Partridge: One of the big topics around both productivity and inequality is AI. The worry is that AI could be a double-edged sword for the UK economy in that it will boost productivity, but all the gains won't necessarily go to everyone equally; there will be many losers. Is that a fair comment?

Paul Johnson: I think there's clearly a risk of that and we are definitely seeing that in the US, where there have already been some big winners from the technology revolution. Even before AI, there was a concentration of economic rents in a small number of incredibly profitable companies, which, through a combination of very high pay and share options and so on, massively rewarded a very small number of people.

Matthew Partridge: Why has the UK economy grown significantly less than other countries over the last 15-20 years?

Paul Johnson: There are several reasons. We were more dependent on financial services than most countries when the financial crash happened. Brexit has clearly not helped; indeed, it has probably slowed things down further since 2016 and since 2021. We have invested less over a long period of time than most other countries, in both private and public terms. Our regulation and planning policies are more extreme and make it much harder to build things.

You can't pin it on any one problem, but all these factors, in addition to the general political chaos – with goodness knows how many prime ministers and uncertainty caused by various changes in direction – will have played a part.

Matthew Partridge: It seems a key danger is that the more the UK economy stagnates, the more disillusionment and political chaos ensue, causing more uncertainty and stagnation.

Paul Johnson: Yes, exactly. You can definitely get locked into a terrible vicious cycle of this kind.

Matthew Partridge: There has been much debate recently about the quality of the government's economic forecasts, which are attacked for being inaccurate or even supposedly manipulated. Reform's Nigel Farage has said he's given serious thought to scrapping the Office for Budget Responsibility (OBR). Do you think this would be a good idea, or is there a role for institutions like the OBR?

Paul Johnson: The whole point of the OBR was to get the government out of the forecasting business – because it was pretty clear that the Treasury's forecasts were politically manipulated – and hand it to an independent body. So, I'm now confident that the forecasts are honest and not manipulated. Ironically, while the OBR has been berated for being too pessimistic, on average over the last 15 years we've found that it's been slightly too optimistic. While it's strange that there are two independent forecasters, the Bank of England and the OBR, we at the IFS thinks that the UK's main forecasting institutions are in the right place, especially as the OBR mainly produces mostly fiscal forecasts and the Bank of England focuses on monetary policy.

Matthew Partridge: What do you see as the biggest fiscal challenges for the UK economy over the next ten to 20 years?

Paul Johnson: Well, I think the big fiscal challenge is that in the past ten years we've seen an unprecedented 5%-6% increase in the share of national income accounted for by taxation. Before that, taxes were for a very long time fairly flat as a fraction of national income.

I think that what people will remember when they look back at this decade isn't going to be Covid or the energy crisis, let alone the mini-Budget, but rather that the British state grew to an extent that is totally unprecedented.

What's more, all the pressures that are pushing spending upwards are going to keep growing, with the commitment to spend another 1% of national income on defence leading to another £30 billion in expenditure. Spending on health is rising relentlessly due to the aging population, with the triple lock ensuring that the same thing will happen to pensions.

Given that we've already got a very big debt pile, it's going to be quite hard to meet these commitments with additional borrowing, especially with previous borrowing coming back to bite us in the form of debt-interest payments.

Perhaps the only silver lining is that while the UK's fiscal situation is much worse than the average OECD country, our debt-to-GDP ratio isn't above the G7 average. Indeed, it is odd that we pay more on our debt than France does, even though it has a higher debt burden. However, this interest-rate disparity is at least partially explained by the fact that we've had higher inflation here for a long period of time, and markets are less confident about our ability to turn things around.

Paul Johnson was director of the Institute for Fiscal Studies between 2011 and 2025, and is currently the provost of Queen's College, Oxford. His latest book, “Challenging Inequalities: How We Got Stuck and Where We Go Next”, with James Banks, Tim Besley, Richard Blundell, Angus Deaton, Robert Joyce and Debra Satz, (Princeton University Press, £25) is out now.

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It is hard to see how Keir Starmer could have had a worse local election campaign. The Labour Party lost hundreds of local councillors, many of them in its core heartlands in the north of England and Wales, and it was pushed down to third place in the total votes cast. One way or another, it is likely to get wiped out at the next general election.

It remains to be seen what happens to prime minister Keir Starmer and his embattled chancellor Rachel Reeves. Their fate will be decided over the next few days or weeks. Either they will just about stagger on, leading a demoralised party that can't decide who should replace them, or they will be ousted in favour of someone else – presumably Andy Burnham, who will have no mandate to govern. We will find out soon enough. But one point is clear: after the issue is decided, the UK will be stuck with a lame-duck government.

That will lead to three big problems. First, the endless speculation about a change of leader and all the political uncertainty around that will drive bond yields relentlessly upwards. The yield on ten-year gilts, the benchmark for the cost of government debt, has already punched its way through the 5% mark, and with each crisis nudges a little higher. The 30-year yield has risen to its highest level in almost three decades and above countries such as France and Italy, even though their long-term fiscal outlook is even worse. That matters. The country has an outstanding national debt of £2.9 trillion, and it is climbing by more than £100 billion every year.

The annual interest payments on all that have climbed to £110 billion and as older debt issued when rates were close to zero has to be replaced, they will keep on climbing. If they go much higher, the government will find itself forced to raise taxes, not to spend more on public services, or invest in infrastructure, but just to service its debts. It is hard to see how that will be popular with voters or the party's backbenchers.

Keir Starmer's government will drift from crisis to crisis

Second, tough decisions will be endlessly delayed. Sooner or later, a British government is going to have to make some harsh choices on public spending. The triple lock on pensions will have to be abandoned; the welfare bill will have to be reduced by reducing entitlements and making it harder to claim for mental-health conditions, and the dire productivity of the public sector will have to be improved. Those decisions can be postponed, but they can't be avoided forever. Starmer and Reeves, however, will not have the political support to make any significant reforms, even if they wanted to. Instead, the government will drift from crisis to crisis, hoping to survive until the end of the week.

Finally, Keir Starmer will have to keep on making concessions to the left. The backbenchers, trade unions and party activists who will decide his fate, or who will choose a new leader if there is a contest, want even higher state spending, more taxes on companies and the “rich”, more rights for workers, along with fewer for landlords and shareholders, and a lot more state intervention in the economy. All of that will damage businesses' confidence.

But even if there is a change of PM, it won't make much difference. As we learned with the constant changes of leader during the last Conservative government, anyone who comes into power without a clear mandate from the voters is inevitably very weak; they don't have any real authority. Gilt yields will still go up sharply, tough decisions will be postponed, and the left of the party and the trade unions will still have to be kept quiet with higher spending. Anyone expecting a fresh start under a different prime minister, presumably with a fresh chancellor alongside them, will quickly be disappointed. There will be no changes of any substance.

Add it all up, and one point is clear. The British economy is now condemned to at least another two or three years of stagnation. At best, the economy will limp along, with 1% or less growth, depending on what happens in the rest of the world. We can give up on any hopes of a sustained recovery – that will now have to wait until after the next election.

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Last week's local election results proved disastrous for the big two parties, and a triumph for populist upstarts on the right and left as the fracturing of politics in the UK accelerated markedly. But do local elections actually matter? Sadly, not much, argues Dan Taylor in The New Statesman.

Whatever stripe of councillor you elect in the local election will “act in the same sad way as their predecessors”, under the same miserable fiscal constraints that make “local government an impotent arm of the centralised British state”.

A century ago, local councils built houses, ran trams and buses, owned utilities, employed thousands and raised most of their own revenue. Herbert Morrison's London County Council, for example, ran more than 70 hospitals and built housing on a scale unimaginable today. Now, local councils “administer social care and collect bins. Local democracy has been replaced with skint service delivery” – and it shames the nation.

Do local elections change much?

Local councils have very limited control over how they raise money, but their list of statutory duties is significant. Councils' core responsibilities include adult social care, children's services including (non-academy) schools, SEND (special educational needs and disabilities) support, local road maintenance, waste collection, housing and homelessness prevention, planning, environmental health, public health, libraries and parks.

Much of this spending is non-optional and not affected by voters' preferences at local elections. A council can choose to scale back flowerbeds and festivals; it can't decide to stop protecting children at risk or refuse to provide emergency accommodation for homeless families.

Are local councils struggling?

Indeed. Councils have spent much of the past few years lurching from financial crisis to financial crisis; more authorities are issuing so-called “bankruptcy” notices; libraries and leisure centres are closing. Everyone is familiar with the impact of the austerity years of the then-coalition and subsequent Conservative governments.

Overall, there was a 21% real-terms cut in funding between 2010 and 2019, putting massive strain on services. What's less well known is that in recent years, there have been decent real-term increases in overall funding, albeit with an increasing range of regional variation. Money for councils grew by around 12% in real terms between 2019-2020 and 2024-2025, and a further 8% since then, taking the overall pie almost back to 2010 in real terms.

Why are local council finances tight?

England's population has jumped by 11% since then and costs have surged in the areas for which councils have responsibility. According to the Institute for Fiscal Studies (IFS), funding per person is about 15% lower in real terms this year than in 2010-2011.

Meanwhile, big increases in the minimum wage have ramped up spending on social care. Other key areas where spending has shot up include temporary accommodation for vulnerable households, specialist and secure children's homes, and a surging bill for specialist home-to-school transport for SEND pupils.

Where do local councils get their money from?

Financing has changed dramatically in recent years. Council tax used to account for about a third of funding (36% in 2010), but now it accounts for the majority (about 56%). That's because central grants from Whitehall have been cut sharply since 2010 – by 55% in real terms up to 2019-2020. As a result, council tax has been rising quickly – the average band D home's annual bill has jumped 16% to nearly £2,400 in three years, an increase of about £330. This year's rise averaged £111, or 4.9%.

The rest is made up of retained business rates, and income from things such as parking fines, as well as central funding. Last year, central government made £69.4 billion of core spending available to English authorities, £4.4 billion more than the year before.

What do councils spend money on?

On average, councils spend about a third of the total budgets on (non-academy) schools and almost another third on social care. The next biggest chunks were the police, and fire and rescue services, followed by road maintenance and transport. Refuse collection accounts for only about 3% to 5% of spending.

However, these headline figures “mask the extent to which social care is squeezing some authorities' finances, because most district councils are not responsible for these services”, says Andrew Ellison in The Times. Local authorities that have responsibility for social care – county councils and unitary authorities such as metropolitan boroughs – typically spend two-thirds of their budgets on them, according to the County Council Network.

Increasingly, says Ellison, councils appear “less like all-purpose civic institutions and more like emergency care administrators with bins attached” – and without the necessary funding.

What are the pressure points?

According to a recent Local Government Association (LGA) survey of senior council leaders, the biggest budgetary worry is Send support, together with social care, home-to-school transport and homelessness. The government has extended temporary accounting rules – letting councils keep spiralling SEND deficits off their balance sheets – until 2028. But that's merely hiding and postponing a fiscal reckoning.

The LGA calculates that eight in ten councils could face insolvency once the sleight of hand is removed. There's a long and ignoble history of local councils turning to financial speculation and optimistic property deals to fill the gaps; many have come a cropper and may continue to do so.

But without radical reform of local government, councillors of all political colours face a thankless and impossible job. “New people may be in charge in many places,” said David Phillips of the IFS. “But they face the same challenges and constraints as the old guard.”

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In January 2013, the then-prime minister David Cameron announced that there would be a “very simple” referendum on whether Britain should stay in or get out of the European Union. The result would draw a line under the whole issue for a generation, he said, so that we, and in particular his party, could all stop “banging on” about it. As the tenth anniversary of the Brexit referendum approaches in June of this year, we might all now reflect on just how simple the whole thing proved to be and how joyful it is that everyone has much better things to talk about.

That reflection would at least help us appreciate that God does indeed have a sense of humour. The process of leaving the EU and judging its consequences has turned out to be anything but simple, of course, and the conversation about our membership of the EU has not ended – in fact, in recent months it has all been rather stirred up again.

Prime minister Keir Starmer is exploring a deal that would align Britain with the EU's single market for goods under his EU “reset” plans. He had already signed agreements to align with the bloc's rules on food standards and carbon emissions. The latest plan would force British manufacturers to comply with hundreds of EU regulations, says The Telegraph, without having any say in how they are shaped. It would, in effect, return Britain to something like the “backstop”, the former prime minister Theresa May's attempt to lock Britain into EU rules to avoid a hard border in Ireland. That idea was repeatedly defeated by MPs and ultimately scrapped by Boris Johnson when he became prime minister. The difference is that rejoining the customs union has been ruled out, to avoid breaking manifesto commitments and protect trade deals with India and the US.

The cost to Britain of Brexit

Those on one side of the Brexit wars – and even some of those in the opposing camp – will say that this is all to the good, at least in principle, as very clearly something had to be done. Brexiters at the time of the referendum argued that disentangling from the EU would unlock long-term economic potential as it would free British policymakers from EU red tape and give them more freedom for manoeuvre, as Ryan Bourne, a member at the time of the referendum of Economists for Brexit, said in The Times towards the end of last year. Yet ten years on, “we cannot pretend things have gone well so far” on that score. A review of the data from the National Bureau of Economic Research (NBER) has suggested that GDP per person is 6%-8% lower today than it would have been if Britain had voted to remain in the EU. Business investment is down 15%, and employment and productivity by 3%-4%.

True, the NBER's study has been loudly mocked. It requires us to believe that if only the vote had gone the right way Britain would have grown four times more than Japan and Germany, almost twice as much as France and Italy, and be performing as well as the US. “If you believe that I have a bridge to sell you,” as Andrew Neil put it on X.

But still, “let's not kid ourselves”, says Bourne. The facts show that the UK has grown more slowly than Italy, France and Japan, and the microeconomic, firm-level data are “crystal clear” that Brexit had a “significant, depressive impact”. The NBER study showed that the more exposed to the EU a company was, the more likely it was to cut investment and slow hiring in the wake of the referendum. By 2023, average business investment was 12% lower and productivity within firms 3%-4% weaker. Roughly half of firms listed Brexit as a top source of uncertainty for years after the vote.

Such evidence cannot easily be dismissed, whatever your political inclinations. “Brexit did not cause Britain's growth malaise, but it undoubtedly deepened it,” says Bourne. “Nor did it create our fiscal woes, although it worsened them too. Denial… helps no one.”

Indeed, Brexit was never likely to be a solution to the underlying complaints that provoked it, and “so it has proved”, says Jeremy Warner in The Telegraph. Ten years on, and the economy is in even more of a mess than it was back then. Immigration has “surged”, the public finances are in “a state of ruin”, many public services appear “broken beyond repair”, and voters are “angrier than ever”. This might not be the fault of Brexit as such, but nor did leaving the EU prove to be “the moment of national renewal that its cheerleaders promised”. Nor was it ever likely to be. “Economic salvation seems as far away as ever.”

Edging closer to the EU might be the best way forward

Brexit remains an issue for a reason. The most obvious impact of the decision to leave the EU was on trade. UK exports since 2019 have been much weaker than in other G7 countries, and trade is an important driver of productivity growth, which in turn is the most important factor in improving living standards. Some of that weakness may be a result of Donald Trump's tariffs, but that in itself just goes to show how much the world has changed since the Brexit referendum, as David Smith has pointed out, also in The Times. Tensions with the US and with China show that “dreams of a painless transition to non-EU trade were the wishful thinking of a different age”. The Iran war quickly brought changing global geopolitical realities into even sharper focus and has bolstered the case for closer cooperation with the EU. “It is increasingly clear that as the world continues down this volatile path, our long-term national interest requires closer partnership with our allies in Europe and with the European Union,” as Starmer has said. The opportunity to strengthen security ties and improve economic relations is, says Starmer, “simply too big to ignore”.

That's surely true, but reversing Brexit – or “resetting” relations – will be easier said than done, as The Economist points out. It would, for a start, be impossible to revert to the pre-2016 status quo. Britain would have to reapply for membership and negotiate its conditions, and would be unlikely to secure the opt-outs it had previously. It would not regain its special budget rebate, for example, and might have to agree to join the euro. The EU has also changed significantly in the interim and there is little desire to reopen a painful debate.

Starmer's attempts to find pragmatic ways quietly to edge closer to the EU might be the best way forward. The EU is more open than it was to allowing non-members to cherry-pick bits of the single market and “new forms of partial membership, Swiss-style, may seem more acceptable to the EU as it considers its further expansion eastwards”, says The Economist. Different types of relationship with the EU could emerge from the reopening of debates about Norway and Iceland joining, or from forging closer links with the western Balkans, Moldova and Ukraine, which “might suit Britain better than a hard Brexit”.

“In retrospect, the 2016 referendum may come to be seen not to have permanently settled Britain's place in the European project,” says The Economist. The relationship will keep evolving, sometimes in unpredictable directions. And for the next few years, that is likely to push the two sides closer together, not further apart.”

What David Cameron got right about Brexit

Whatever happens, Cameron was right about one thing. On one level, the issue voted on in the referendum ten years ago was a simple one. Economics is mostly common sense and the issue at stake and the likely consequences should have yielded to some simple logic. Britain was on the doorstep and a member of one of the largest free-trade blocs in the world. Making a decision that would certainly make trade with that bloc more costly and raise barriers would, all else being equal, surely leave Britain worse off.

All else is never quite equal, of course, hence the arguments that Brexit could conceivably give the country more freedom to make better arrangements that would be more conducive to growth. In other words, alongside the fact that Brexit would probably make us worse off there was a judgement to be made about whether Britain's elite and bureaucracy would in the long run prove more effective than the one in Brussels. A relatively simple matter of judgement on both counts, if ones that have had, as we have seen, some rather more complex ramifications.

There is no point relitigating the matter. We are where we are. But in the years since the vote we might draw two lessons from the experience of Brexit. The first is that Britain's historical tendency to “muddle through” rather than plan might not be such a bad one, as Paul Cornish, a professor of strategic studies at the University of Exeter, points out in the Financial Times. As Charles Lindblom put it, “Policy is not made once and for all; it is made and re-made endlessly. Policymaking is a successive approximation to some desired objectives in which what is desired itself continues to change under reconsideration”.

What could be more appropriate, says Cornish, in “a time of seeming chronic volatility and complexity, particularly in matters of national strategy and international security”? Breaking free from the EU and setting out alone as “Global Britain” on the high seas of freedom and opportunity might have seemed like a great plan to some and far superior to all the muddling and compromise of EU membership. Following a raid from the pirates of reality, we're back to the muddling.

“Populists” unwittingly make the case for a stronger Europe

The second lesson is that the EU may be less bad than all the alternatives, as Janan Ganesh puts it, also in the FT. At the time of the referendum, victorious Brexiters were fond of predicting that other countries would soon follow our good example and fall like dominoes out of the EU. A decade on, all of the EU's 27 other dominoes stand and, despite having entered an “era of ardent nationalism”, no one really wants out of the “supranational club”. If anything, nationalist politicians on the continent go out of their way to reassure voters that they have no intention of leaving. Europeans still trust the EU above their national political systems, and support for the euro has grown.

“Few things are stranger about modern politics,” says Ganesh, but the explanation is not hard to find. Nigel Farage, Vladimir Putin and Donald Trump have all unwittingly helped to make the case for a stronger Europe and have “given a multilateral, technocratic and liberal institution a sense of existential purpose that it was starting to lack”. Moreover, the “debasement of our own political elite” post-referendum has “brought the UK closer to the European experience”. As Labour edges closer to the EU, Conservatives may “scream betrayal”, but “voters shrug”. “Through their comportment in office, Brexiters have forfeited the benefit of the doubt.”

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Savvy Squirrel is the mascot for the latest government campaign to get people investing, rather than “squirrelling away” their money in savings accounts. But there is something you should know about red squirrels. They aren't much good at anything. At the end of the 19th century, there were over 3.5 million of them knocking around the UK. Now they are all but extinct in England and Wales, while across the UK there are well under 300,000 of them left – mostly in Scotland. They succumb easily to squirrel pox carried by grey squirrels; they aren't as big or as good at finding food as grey squirrels; and when they do find food, they often fail to hang on to it.

It's nice that they put food away for the winter (everyone loves a saver). But depending on whom you listen to, they lose anywhere up to 25% of the food they cache to either theft or forgetfulness (scientific arguments about the spatial memories of the red squirrel are ongoing). They also can't seem to be helped. There are some 47 different organisations trying to stop them disappearing from the UK altogether. But their numbers just keep falling. They are, effectively, Britain's pandas.

Imagine being a policymaker in the UK, knowing all this, looking for a mascot for a new campaign to encourage ordinary people to invest and choosing this animal. One that never invests, only saves; that saves in such a way that guarantees a negative return in not just inflation-adjusted terms but also in nominal terms every single year; and which is heading down the path to extinction despite large sums of taxpayers' money being chucked at it every year.

Savvy Squirrel picks up where “Tell Sid” left off

Older readers will remember the Tell Sid campaign of the 1980s, born out of Margaret Thatcher's plan to get shot of the UK's nationalised industries and create a culture of shareholder democracy at the same time.

The Savvy Squirrel campaign is an infantile attempt (the squirrel is animated) to pick up where that left off. Expect to see Savvy Squirrel on billboards near you soon if you haven't already, on taxis in Manchester, or on the telly with the messages “Take the next Step. Invest” and “Saved a bit? Why not invest a bit?” The message isn't idiotic, of course. The UK has an unusually high savings ratio and households have lots of cash – there is around £ 2 trillion sitting in our accounts.

That doesn't make sense. Not for the savers themselves – once you have six months worth of emergency cash, given up the superior returns that come from an equity portfolio, makes your future less comfortable than it could be. Not for the market – all that money could be flowing into the UK stock market, bolstering liquidity, valuations and the associated ecosystem of profession that the UK needs to keep supporting. And not for the state, either – the less people invest, the less wealth they will have on retirement and the more expensive they will be for the state.

That's why chancellor Rachel Reeves wants to encourage people to “have a small stake in the future of this great economy”. However, if Reeves really wants the UK to become a nation of shareholders, there are more useful things to be done. The first might be to explain to the 22 million people with auto-enrolment pensions in the UK that they are already shareholders, what that means and why it matters. That needs to be done on social media rather than on the telly, as it is best to take information to where people are already talking about these things. Next would be to work on making things more simple rather than more complicated: every change to the pension system and the ISA system makes people trust the wrappers they should be using to invest less.

Then there is the tax system – if you want people to invest in shares, maybe cut capital-gains tax to a level where is it not an effective wealth tax (at current levels it almost always taxes nominal rather than just real gains). The same goes for stamp duty on shares, another one of the UK's underappreciated wealth taxes, and one you pay even inside your ISA and SIPP (when they say tax-free, they don't mean entirely tax-free).

Reeves might also take a very firm line on annual general meetings (AGMs). The government is reviewing the rules on corporate reporting, and there is talk of removing the requirement for in-person AGMs and shareholders' votes on executive pay. Both are appalling anti-shareholder democracy ideas.

Finally, risk warnings. There are changes to these on the way, but if you try to buy any investment product you will find “capital at risk” warnings everywhere. So heavy-handed has the warning system been, says Holly Mackay of Boring Money, a financial research platform, that they are “akin to British Airways telling anyone trying to book a flight how many aviation deaths there have been in the last year”. The result is that around 75% of cash-only savers think that there is a less than 50% chance that £1,000 invested today will be worth more than £1,000 in five years. Either these overly nervous people were squirrels in a past life or the regulators have overplayed their hand.

Risk warnings need to be toned down and the ability of both funds and the listed companies themselves to advertise their wares rapidly ramped up. The Savvy Squirrel campaign has something going for it. It shows that the government recognises there is a problem with the investing environment in the UK. However, it also shows that they won't be solving it any time soon. Not like this, anyway.

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A global energy crisis is emerging, following a similar pattern to the Covid pandemic. Then, impending disaster could be seen approaching from a distance. In January 2020, the Chinese city of Wuhan was locked down. In early March, Italy followed suit. Two weeks later, Boris Johnson announced a nationwide lockdown in Britain.

Emerging Asia is already in the throes of an energy crisis. Sri Lanka and Bangladesh are rationing fuel. The Philippines has implemented a four-day work week for civil servants. Egypt has imposed a 9pm curfew for shops and restaurants. Could similar pain be heading for Britain?

For all the grumbling about more expensive petrol, daily life in Europe hasn't yet been much affected by the closure of the Strait of Hormuz, says The Economist. But the last tankers to leave the Persian Gulf before the war began have now reached their destinations. No more fuel is on the way. Strategic stockpiles are being drawn down. Even if Hormuz reopened today, a cumulative loss of about 5% of annual global oil output now looks baked in, a figure that could double if the strait remains closed. The last time oil demand fell by 10% was during the Covid-19 lockdowns of 2020.

How are markets reacting to the energy crisis?

Brent crude oil hit $115 a barrel on Wednesday, its highest level since the summer of 2022 and a 90% rise since the start of the year. While oil futures have risen, markets remain “strangely sanguine” given the huge scale of supply destruction, says Liam Denning on Bloomberg. Oil prices for 2027 delivery are up a modest 17% since the war began.

It could take years to undo the damage that has already been done to global inventories. And with “two blockades” in place and little progress on peace talks, it is still far from clear when the strait will reopen. A survey from the Federal Reserve Bank of Dallas reports that four-fifths of US oil executives now don't expect traffic in the strait to return to normal levels before August, with 40% thinking it won't happen until November or later.

Stock traders optimistically expect everything to be resolved soon, but energy experts and commodity traders are far more alarmed, says Robert Armstrong in the Financial Times. “Horror stories” about the prices paid to deliver diesel to Asia are rife. Those prices are sucking scarce global barrels away from European ports.

Uncertainty levels are through the roof – even the geopolitical “pointyheads” don't have a clue what the outcome will be from US-Iran negotiations. Energy traders, who usually profit from volatility, hate the uncertainty created by Donald Trump's Truth Social posts, which are impossible to predict and cause markets to swing wildly.

There is a growing “disconnect” between “buoyant” stock prices and a real economy suffering energy shocks, says an article by Edmond de Rothschild Asset Management. On a relative basis, the US and China look better placed to face the coming energy crisis than Europe or Japan. “Behind the facade of market rebounds, the “economic fundamentals” are slowly “deteriorating”. Investors “need to stay invested but without being led astray by illusions”.

How the energy crisis is affecting the Persian Gulf region

World markets have “lost their fairy godmother”, says Ambrose Evans-Pritchard in The Telegraph. The Gulf states boast vast sovereign-wealth funds – valued at $5 trillion – representing years of accumulated oil profits. Most of those funds have been invested in Western assets, keeping government borrowing costs low and “turbo-charging excesses in US private credit”. Yet with problems to solve closer to home, the region's monarchies are about to tap those rainy-day funds.

Signs of stress are apparent. The wealthy Emiratis have reportedly raised the topic of securing an “emergency dollar swap line” from US Treasury secretary Scott Bessent, to the “consternation” of those who believe in “America First”. Swap lines are a “backbone of the global dollar system”, says the Financial Times. They see central banks or finance ministries swapping currencies at times of financial stress, when demand for US dollars often surges. Swaps prevent financial panic from spreading and are reversed once the crisis passes.

Gulf states boast large foreign reserves and are unlikely to face liquidity stress. But swaps might help “avoid financial market disruption”, says Stephen Paduano of Oxford University. Gulf sovereign-wealth funds have ample stock and bond holdings, but selling those to raise quick cash “could cause a stock market rout” and stress the US Treasury market.

“Emirati officials haven't made a formal request for a swap line,” says The Wall Street Journal. Discussions are only “preliminary”. The idea may not be so much a request as an “implicit threat” to the global role of the US dollar. The US Treasury has been warned that if the Gulf runs short of dollars “it may be forced to use Chinese yuan” for oil sales instead.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

Another week, another FTSE 250 company disappears. On Monday, William Hill's owner, Evoke, said it was in talks with Bally's over an offer for the company that would value it at more than £200 million. It may not seem like much for such a well-known brand, but Evoke is weighed down by debts that have depressed the value of the shares. The bigger problem, however, is that it is grappling with the huge rises in gambling taxes imposed by chancellor Rachel Reeves in the last Budget. She pushed up remote gaming duty, which applies to online casino and roulette games, from 21% to 40%, and online betting duty from 15% to 25%. The rate for betting at old-fashioned bookmakers on the high street was left at 15%, but that was little consolation for the major chains, which these days make most of their money from their apps, and mainly use the shops as a form of advertising.

It is not just Evoke that has been hit by that tax rise, although it has suffered more than most as its operations are concentrated in Britain. Paddy Power said late last year that it was closing 57 of its British shops with the loss of more than 250 jobs, while Entain, the company that owns Ladbrokes and Coral, has also started to close branches. Ahead of the tax rise, Betfred warned it might close all of its more than 1,200 physical stores if the new levies went ahead, and while that has yet to happen, it might well over the next year or two. Add it all up, and the outcome is clear. The tax rise has led to a big wave of closures across what has always been a huge industry.

There are three big problems with gambling tax rises. First, they will deal another big blow to the high street at a time when it is already facing a wave of closures of retailers, cafes and restaurants. There are more than 5,500 betting shops across Britain, at least before the latest round of closures. That is more than triple the number of bookshops and double the number of newsagents. Sure, that branch of Coral or William Hill, with its tatty biros and slightly dodgy-looking punters, was never exactly the most cheerful place in the typical town centre. But even so, it paid business rates, employed people and, in a small way, helped keep the high street alive. If they all start to close down, nothing will replace them. There will just be a few more dismal boarded-up shopfronts.

Raising gambling taxes will crush a British success story

Next, it does not look as if gambling tax rises will raise anything like as much money as expected. The £1.1 billion in extra cash forecast to roll into the Treasury assumes that there will only be very minor changes to behaviour (it would be £1.8 billion with no change). But that hardly seems plausible. If there are fewer physical shops, if the odds are less attractive and less money is spent on online marketing, the casual punter who puts the occasional fiver on the Cup Final or the Grand National will drift away. The hardcore gamblers will use a “virtual private network” that disguises which country you are visiting the internet from, to bet offshore, or else to gamble on the fast-growing prediction markets. Either way, the tax will raise far less than forecast.

Finally, raising gambling taxes will damage a major British industry. Companies such as Bet365 and Entain are among the global leaders of an industry that is worth well over $250 billion worldwide and growing all the time as legal restrictions are relaxed. A robust domestic market is vital if entrepreneurs are to flourish and established businesses are to succeed on the global stage. You might think the Treasury would want to back such success stories. After all, there are not that many of them any longer. Instead, it seems determined to tax them into extinction.

It seems extraordinary that the Treasury hasn't worked out by now that when you increase the taxes on an industry, it gets a lot smaller very quickly. But it looks as if it hasn't and will have to relearn that lesson all over again, and in the most expensive way possible. Even if the Treasury gets its extra billion, it will, in the process, have crippled a major British industry, worsened the crisis on the high street and pointlessly destroyed thousands of jobs. Even for the most hopeless chancellor of the last 50 years, that seems like a losing bet.

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What is happening at Royal Mail?

Royal Mail announced this week that a pilot scheme it's been running since last July – under which it delivers second-class mail only every other weekday and not at all on Saturdays – is to be rolled out nationwide from next month. This scaling back of its level of service to customers, it says, is part of a £500 million investment plan to tackle late deliveries. There will be no change to first-class post, which will still be delivered daily from Monday to Saturday, or to parcels, at up to seven days a week. The plan ends a dispute with postal unions and includes a provision to allow 6,000 part-time postal workers to increase their average weekly hours if needed. Meanwhile, earlier this month, the price for a second-class stamp rose another four pence to 91p.

So, worse service for more money?

That's par for the course with Royal Mail. The cost of first-class stamps has risen by 10p to £1.80 – meaning the price has more than doubled since 2020 (it's up 137%) with eight separate increases. Yet the quality of the service has declined and the business has repeatedly failed to meet delivery targets set by the regulator, Ofcom. In 2024-2025, only about 77% of first-class mail was delivered on time (against a 93% target), alongside similar underperformance in second-class deliveries. There have been multiple reports of a chaotic and demoralising working environment. Mail has been piling up in sorting offices from Cornwall to the Scottish islands, with numerous accounts of postal workers being instructed by managers to prioritise parcels over letters and even hiding vast quantities of mail from bosses. Ten different postal workers, all from different delivery offices, told the BBC that “take the mail for a ride” was a common phrase in their workplace.

Why is Ofcom not doing anything about Royal Mail?

Arguably not furious enough. In October 2025, Ofcom fined Royal Mail a record £21 million for failing to meet its delivery targets – not nothing, but hardly draconian for a business turning over £8.2 billion a year – and issued some stern words. But the regulator has been dishing out similar warnings and fines every year for the past three years – with fines for the period totalling £36 million – and nothing has changed. Part of Royal Mail's failure is due to operational failures and labour disputes. But the company is also battling a giant structural issue that may well make it doomed to fail without radical surgery.

Why is Royal Mail struggling?

In the age of the internet, individuals and businesses are sending a fraction of the letters they used to, but a lot more parcels. Over the past two decades the number of letters sent each year in the UK has collapsed from around 20 billion annually in the mid-2000s to roughly six billion today, while parcel volumes have surged with the rapid growth of online shopping. That transition has proven all but impossible to manage because Royal Mail's cost base – its nationwide delivery network and legally mandated “universal service obligation” (USO) – was designed for a high-volume letters business that no longer exists. The modern Royal Mail is still obliged to deliver letters to all 32 million addresses in the UK (four million more than 20 years ago) at a uniform price, but it doesn't have the volume of letters business to do so economically and efficiently.

Who owns Royal Mail?

Royal Mail is owned by Czech billionaire Daniel Kretinsky, an energy magnate who made a fortune transporting Russian gas to eastern Europe and is one of the richest people in Europe. For most of its five-century history Royal Mail was a public service, but it was privatised by the Tory-led coalition government in 2013, having been legally separated from the Post Office the year before. The state kept a 30% stake, but sold its shares (at a profit) in 2015, ending 499 years of state ownership. Then, in 2022, Royal Mail changed its name to the unlovely International Distribution Services (IDS), becoming a subsidiary of a listed holding company that also owned Parcelforce Worldwide and GLS Group.

In 2024, having built up a large stake in IDS over several years, Kretinsky's privately owned Czech-based EP Group offered to buy the whole thing – a £3.6 billion takeover that was approved by shareholders and the Labour government, and which was completed in May 2025. But since EP took control, the service has only got worse. Now, only about 75% of first-class mail arrives on time. Promises of new investment have not materialised. And the firm has been loaded up with £3 billion in debt, private-equity-style.

Is Royal Mail more stable now?

Too early to say. In September 2025, Royal Mail announced a profit on an adjusted basis for the first time in three years for 2024-2025, having increased volumes through automation and locker deliveries, as well as cutting costs. Royal Mail's adjusted operating profit was £12 million, its first since the year to March 2022. Including voluntary redundancy costs, it reported operating losses of £8 million, against a £348 million loss for the year to March 2025, on revenue up 7% to £8.23 billion. However, these figures pre-date the takeover: Kretinsky inherited a modestly improving scenario, in which marginal profitability was heavily dependent on cost reductions. Analysts also have concerns about debt and financial engineering associated with the takeover.

Questioned by a House of Commons trade and business committee in March, Kretinsky said he was “deeply sorry” for late deliveries, but that getting the service back on track would be conditional on further reform of the universal service obligation. Alas, trying to “stitch a 21st-century parcels service onto a regulated letter-delivery service is never going to work”, says Alex Brummer in the Daily Mail. What is needed is radical reform and modernisation at all levels, “otherwise the start-up services, without historic costs and obligations, are going to make mincemeat of Royal Mail”.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

The government has been shouting about getting more people to invest for some time now. For the chancellor Rachel Reeves, it would mean more money to help boost the UK economy.

And she so desperately wants people to invest, she even went ahead with plans to slash the cash ISA allowance from £20,000 to £12,000, effective from the next tax year, for those under age 65.

For anyone looking to take advantage of a £20,000 ISA allowance, they would need to invest anything above £12,000 using a stocks and shares ISA.

This has caused a bit of a stir among cash lovers, though in reality, a large majority of those stomping their feet over the cut have never used their full cash ISA allowance in the first place.

But, if we put feelings aside, the important thing to remember is that people should consider investing – not to please Reeves, but to boost their own wealth. See our guide to investing to help you get started.

I am not sure a squirrel is the right choice for its Invest for the Future campaign, though. It's too closely associated with cash and investing is not squirrelling. Investing does not mean hoarding your cash. And while a squirrel may stash its nuts, investing means you may lose some nuts along the way but hopefully end up with a lot more than you started with.

Savvy the Squirrel is certainly cute and likeable, unlike the pensions ‘Workie’ for those who remember the scary monster appearing on TV screens in 2015 to promote auto-enrolment pensions.

Though, I am not convinced the squirrel will be effective in converting cash hoarding Brits into a nation of investors with the same power as the British Gas ‘Tell Sid’ campaign – now that really did demonstrate the power of spreading the word.

Investing versus saving

If the Savvy Squirrel doesn't convince you to invest, then it’s worth considering what investing could mean for you in the first place.

Latest data from investing platform Vanguard shows that if you had invested £100 in global shares in 1970 and held them through the oil shocks of the 1970s, the dot-com boom, and the Global Financial Crisis, it would now be worth around £35,000, that is 10 times the £3,400 if you had kept your savings in cash.

We take a closer look at saving versus investing in our article.

When should you invest?

Getting started with investing is simple, despite the myths that you need expertise or a lot of cash – you need neither of those. You can invest with just a few pounds and you don’t need to be a trader.

But there are some simple rules you should consider before you invest. This includes:

• Clear unsecured debt
• Build emergency savings
• Have some cash for short-term goals (five years or less)
• Do not invest money you need for bills

And then there are also simple rules to consider when you do start investing. This includes:

• Start small to build confidence
• Do not panic when markets fall; keep investing each month
• Investing is for the long term, so invest money you do not need for five years or more.

According to Vanguard, Brits have a collective £200 billion sitting in excess cash. This is cash that can be invested. By not investing, you are at risk of letting inflation eat into your savings over the long-term. Inflation has come down from its highs of 9.6% in November 2022, but at that time, unless you were earning over 9.6% in cash interest, you were losing money.

Inflation is 3.3%, but again, if your cash is not earning more, you’re losing spending power as the value of your cash erodes.

And remember, when you invest, the power of compounding can be phenomenal and over time, you will build more wealth. And of course, while there are risks in investing, most people see an upside and become more financially resilient than if they had stuck with cash.

Summary

• UK inflation rose by 3.3% in the 12 months to March 2026, up from 3% in the year to February.
• Prior to the conflict in the Middle East, experts had predicted inflation to fall from 3% in February.
• Some forecasters expect CPI inflation could rise above 4% by the autumn.

| What is inflation? | UK inflation forecast | Inflation basket of goods | CPI release dates |

Good afternoon and welcome to MoneyWeek’s live coverage of the latest UK inflation data release.

Tomorrow morning, we’ll find out just how heavily the oil squeeze that followed the outbreak of the Iran conflict pushed up UK prices.

Follow us here today for rolling preview and analysis.

When is the March UK inflation data released?

The Office for National Statistics (ONS) will release the latest UK inflation figures – covering the month of March – tomorrow morning (22 April) at 7am.

Inflation statistics are always retrospective; they cover the month before the one in which they are released.

Last month, the inflation release for February showed that CPI inflation held steady at 3% over the preceding year. Significantly, this covered the period up until the outbreak of the conflict in Iran.

It is almost a given that inflation will have risen during March as a result of the war. The most important question is how significant the increase will prove to have been.

What is CPI inflation?

Inflation measures the pace at which prices increase. It is calculated by assessing changes in a core, representative basket of goods and services that economists deem representative of the UK economy as a whole.

The core measure of inflation – and the one we’ll be referring to here unless specified – is the annual change in the Consumer Prices Index (CPI). There are other measures of inflation which we’ll refer to, but CPI is the metric that is most closely followed, largely because it is the easiest metric with which to make international comparisons.

The Bank of England – like most central banks – targets a 2% annual CPI inflation rate. This is generally viewed as healthy by economists, representing an economy that is growing but without prices increasing too fast for household spending power to keep up.

What do analysts expect happened to UK inflation in March?

March is a key month in the recent history of UK inflation.

Up until February, inflation had been on a downward trend. There were some bumps in the road, but the expectations from most commentators and the Bank of England’s own forecasters was that inflation was trending down towards the 2% target – perhaps as soon as the second quarter of 2026.

The Iran conflict has drastically changed the picture. With the Strait of Hormuz effectively closed since the beginning of March, oil prices have risen, putting pressure on the input costs for almost every kind of business.

“March's CPI figures are expected to show inflation edging up, reflecting the impact of geopolitical tensions on oil and commodity prices, which feed through into energy, fuel and food costs for households,” said Harriet Guevara, chief savings officer at Nottingham Building Society.

Analysts at Bank of America and Deutsche Bank predict a 3.3% rate of annual CPI inflation.

Why does inflation matter to you?

Inflation impacts your money in two different ways – one of them direct, the other less so.

The direct impact is the amount that you pay for things. As far as the March data goes, you’ve already felt this impact; if you noticed goods (especially petrol) being a little more expensive over recent weeks, or your budget didn’t stretch as far as normal, that’s because of inflation.

But it has a less direct, and longer-lasting impact. Higher inflation is a warning sign for central bankers, and the only lever they can pull to bring it down is to increase interest rates.

Higher interest rates mean that mortgage rates increase, as do interest rates on any kind of debt you hold. On the other hand, it could see the interest that you earn on your cash savings increase.

How high could UK inflation go this year?

The oil shock following the Iran war will almost certainly have pushed the UK’s rate of CPI inflation up in the year to March. The bigger question in many respects is how high the metric could reach later this year.

Former Bank of England rate-setter Michael Saunders, now senior economic adviser at advisory firm Oxford Economics, thinks CPI inflation could reach as high as 4.5% by the end of the year – and that even if the oil crisis resolves, the impact could be long-lasting.

“Because of uncertainties regarding the extent to which higher inflation will affect inflation expectations and pay growth, the scale of any second-round effects is unlikely to be clear until early next year,” said Saunders.

See our UK inflation forecast explainer for more detail on where inflation is expected to go next.

Thanks for following our preview coverage of tomorrow's UK interest rates decision this afternoon. We're pausing live coverage for now, but join us from 7am tomorrow as we bring you live coverage of the inflation figures from their release.

Good morning and welcome back to our live coverage of the inflation data for March 2026. The Office for National Statistics (ONS) will release the figures very shortly.

UK inflation rises by 3.3%

The Consumer Prices Index (CPI) rose by 3.3% in the 12 months to March 2026 – up from 3% in the year to February. This data covers the first month since the conflict in the Middle East began on 28 February.

What drove the UK inflation rate rise?

On a monthly basis, CPI rose by 0.7% in March 2026 – up from 0.3% the year before.

The Consumer Prices Prices Index including owner occupiers’ housing costs (CPIH) rose by 3.4% in the 12 months to March 2026, up from 3.2% in the 12 months to February. On a monthly basis, CPIH rose by 0.6% in March 2026, compared with a rise of 0.3% in March 2025.

Motor fuels was the main driver of the monthly change in the annual CPIH and CPI rates, the ONS said. Falling prices in clothing partially offset the rise.

Rachel Reeves: “Our economic plan is the right one”

Chancellor Rachel Reeves has responded to the latest inflation data, insisting the government’s economic plan has put them in a stronger position to help families as the impact of the war in Iran affects the UK economy.

“This is not our war, but it is pushing up bills for families and businesses. That’s why it’s my number one priority to keep costs down,” she said.

"Our economic plan is the right one and has put us in a stronger position to support families in the face of this new crisis.

“We’ve taken £117 off energy bills, frozen rail fares and protected motorists with the fuel duty freeze. We’re acting to protect people from unfair price rises if they occur to bring down food prices at the till, and are boosting long-term energy security — building a stronger, more secure economy.”

Transport drives UK inflation in March 2026

Transport, principally motor fuels, made the largest contribution to the increase in CPI annual inflation in March.

Housing and household services prices also accelerated as did food and non-alcoholic beverages, and recreation and culture prices.

The increase in the inflation rate was partially offset by a fall in clothing and footwear prices.

How have petrol prices changed?

Fuel prices have shot up in recent weeks, after the US and Israel launched strikes on Iran on 28 February. Wholesale oil prices increased after Iran shut the Strait of Hormuz, a narrow waterway between Iran and Oman through which 20% of the world's oil is transported. As petrol and diesel are made by enriching crude oil, drivers saw prices at the pump surge.

The average price of a litre of petrol has now fallen back slightly to 157p, according to RAC fuel watch on 21 April, but it’s still 24.7p per litre more than before the Iran war began. On 14 April, it had risen to 25.5p more than before the conflict. The average price of a litre of diesel was 190p a litre on 21 April – 47.8p higher than before the conflict, but slightly less than the 49.2p difference on 14 April.

The price of a litre of petrol is now 24p more expensive than a year ago, according to analysis by roadside assistance provider, The AA. It means drivers are now paying £13.20 more to fill a typical 55-litre petrol tank compared to this time last year.

Signs of living costs rising

While drivers may have noticed the price of fuel rising when they visited the pumps since the war began, today’s inflation data shows how prices of goods and services have changed in March.

“These are the first flickers of the Middle East conflict heating up everyday costs, with volatile oil and gas market pricing hitting forecourts,” Susannah Streeter, chief investment strategist, Wealth Club said.

“There’s likely to be further flare-ups on the way, especially if a longer-term resolution isn’t agreed.”

The renewed climb in fuel prices puts households at risk of squeezed budgets, Streeter said.

“Shoppers have turned cautious, and it seems retailers have had to discount to shift stock, with prices for clothing and footwear declining sharply month on month. They dipped by 0.8% in the 12 months to March 2026 compared with a rise of 0.9% in the 12 months to February.

“It was the lowest recorded annual rate for March since 2021 when prices were hit by the COVID-19 pandemic. Clearly consumers are tightening their belts as another cost-of-living crisis arrives.”

How do you feel about the cost of living?

Inflation affects people in different ways – as people have different spending habits, your personal inflation rate can differ to the national inflation rate.

For instance, motorists who need to regularly fill up their car with fuel will notice their transport spending increasing more than people who tend to walk everywhere.

How are you feeling about the rising cost of living?

What does the UK inflation rate rise mean for savers?

The average savings rate is currently 3.46%, according to money comparison website Moneyfactscompare.co.uk. This is higher than the latest inflation rate of 3.3%, meaning savers can get real returns on their cash – but it’s important to shop around.

The best easy access savings account on the market right now pays 4.50%. This is the Chase Saver with boosted rate – it includes a 2.25% AER bonus rate that's fixed for 12 months. The underlying variable rate is 2.25%.

There are currently 1,582 inflation-beating savings accounts, including 139 easy access, 131 notice accounts, 138 variable rate ISAs, 387 fixed rate ISAs and 787 fixed rate bonds.

Caitlyn Eastell, personal finance analyst at Moneyfactscompare.co.uk, said: “During times of uncertainty, some savers may place higher value on flexibility. Easy access accounts can be useful to help manage monthly volatility, giving savers the freedom to respond to unexpected costs."

Savers face a "tricky balancing act" when choosing between a fixed or variable rate account, Eastell said. "While they may be able to enjoy more competitive returns in the short-term, inflation will quickly catch up, eroding their hard-earned cash. In any case it’s crucial savers shop around for deals that pay over 3.3% to ensure they aren’t left out of pocket.”

Is the UK heading for stagflation?

The latest UK inflation figures are a worry for policymakers given that they arrive alongside a weakening economic picture.

The International Monetary Fund (IMF) downgraded its forecast for UK economic growth last week, saying that the country would be hit harder by the fallout of the Middle East conflict than any of the other members of the G7 (a group of seven rich nations of which the UK is a member).

This combination of inflation and economic stagnation is often referred to as ‘stagflation’, and poses a major headache for rate-setters. Usually, the Bank of England would hike rates to combat higher inflation – but that risks exacerbating the weakening economic situation.

On the plus side, economic weakness could in itself prevent inflation getting too out of hand.

“Though rising services inflation will worry rate-setters as it suggests that the fallout from the Iran war is already intensifying underlying price pressures, the squeeze from a weakening economy should limit any second-round effects,” said Suren Thiru, chief economist at the Institute of Chartered Accountants in England and Wales.

However, Thiru added that despite the extended ceasefire that has been announced, energy costs and food prices are likely to continue to rise and could lift UK inflation above 4% by the autumn.

Higher UK inflation could push mortgage rates higher

Despite the weakening economic situation in the UK, the Bank of England may veer towards hiking interest rates anyway if it deems the risks from runaway inflation to be too great.

“That would likely mean higher mortgage rates, adding to the cost pressures facing those looking for a home loan and putting further strain on borrowers coming to the end of cheaper fixed-rate mortgages,” said Charlotte Kennedy, Chartered Financial Planner at wealth manager Rathbones.

According to data from Moneyfacts, the UK’s average mortgage rate has risen from 5.50% to 5.71% since the previous inflation announcement.

“Homebuyers will need to evaluate their affordability because rates could stay higher for longer as the Bank of England tries to bring inflation back towards its target,” said Caitlyn Eastell, personal finance analyst at Moneyfacts.

How could higher UK inflation impact your investments?

While higher UK inflation is likely to lead to increased mortgage and savings rates, it is less straightforward to say how it could impact your investments – largely because different investments will respond differently to higher inflation.

Gilt yields are likely to rise, assuming that the Bank of England delays or reverses its cutting cycle in response to higher inflation, and this would likely feed through into higher bond yields.

But equities are a mixed bag. “UK equities, particularly consumer-facing sectors, face margin pressure from rising input costs,” said Lale Akoner, global market analyst at trading platform eToro.

“Conversely, energy and commodity-linked stocks should benefit from sustained oil strength,” Akoner added.

How will the Bank of England respond to higher inflation?

The Bank of England’s Monetary Policy Committee (MPC) faces a difficult decision when it next sets UK interest rates.

Given the twin challenges of a weakening economy (which would normally imply rate cuts) and rising inflation (which would normally imply rate hikes), it is far from clear what the MPC will decide.

“After the shocks of Covid and the Ukraine war, central bankers remain hypersensitive to anything that risks embedding another round of inflation,” said Rob Morgan, chief investment analyst at investment manager Charles Stanley Direct.

The next MPC meeting takes place next week, and its decision will be announced on 30 April.

“The BoE is expected to put interest rates cuts on the backburner once more,” said Morgan. “The MPC needs time to assess the impact and will no doubt resist jumping to any conclusions about how long the conflict lasts and the extent of any pass through to core inflation.”

Services inflation remains sticky

Most experts had expected an increase in goods inflation, which is a logical consequence of the Iran war pushing up oil prices.

Alarmingly, though, this was accompanied by a rise in services inflation from 4.3% in the 12 months to February to 4.5% in the 12 months to March.

Services inflation has been running persistently ahead of goods inflation since July 2023. This sticky services inflation has been a major upward driver of overall UK inflation throughout that time.

This was largely due to increased air fares, and according to Deutsche Bank’s chief UK economist Sanjay Raja the bank’s core services measures, which factor out some more volatile inputs, “remained broadly unchanged”.

Still, persistent services inflation compounds the headache faced by MPC rate-setters next week.

UK inflation: other metrics

So far today we’ve mostly discussed the headline consumer prices index CPI figure, which rose 3.3% in the year to March.

Some of the other key metrics from today’s release are:

• Consumer Prices Index including owner occupiers' housing costs (CPIH) rose by 3.4% in the 12 months to March 2026, up from 3.2% in the 12 months to February;
• Core CPIH (CPIH excluding energy, food, alcohol and tobacco) rose by 3.3% in the 12 months to March 2026, down from 3.4% in the 12 months to February;
• Core CPI (CPI excluding energy, food, alcohol and tobacco) rose by 3.1% in the 12 months to March 2026, down from 3.2% in the 12 months to February;
• On a monthly basis, CPI rose by 0.7% in March 2026, compared with a rise of 0.3% in March 2025;
• CPIH rose by 0.6% in the month to March 2026 (up from 0.3% in the month to March 2025), while core CPIH rose by 0.3% over the same period (down from 0.4% a year before).

Recap: UK inflation rose to 3.3% in year to March

Here’s a recap of this morning’s UK inflation headlines:

• CPI inflation rose to 3.3% in the 12 months to March;
• This was largely driven by increases in transportation costs, especially motor fuels – largely thanks to the impact of the war in the Middle East;
• Services inflation has remained sticky, rising from 4.3% in the 12 months to February to 4.5% in the 12 months to March;
• Higher inflation could prompt the Bank of England to slow its pace of rate cuts, or even raise interest rates – potentially leading to higher mortgage rates.

Thank you for following our coverage of today’s UK inflation data release. As expected, the Iran war has pushed up prices across the UK – how will policymakers react? We’ll find out at the next MPC meeting, which is taking place next week.

We’re ending today’s live coverage here, but keep an eye on the MoneyWeek website and subscribe for email updates as we bring you more inflation news and reaction following today’s release.

The UK economy is now expected to grow by less than 1% in 2026 following disruptions due to the war in Iran, new forecasts from the International Monetary Fund (IMF) show.

Economic growth in the UK, as measured by GDP, is now forecast to come in at just 0.8% in 2026, down from the 1.3% that the IMF predicted before the war started.

This growth downgrade of 0.5 percentage points is the largest among the G7, a group of seven rich nations of which the UK is a member.

Every G7 country has had its growth forecast cut by the IMF in its latest forecast apart from Japan, which has remained stable.

The IMF’s latest forecast has also downgraded UK economic growth expectations for 2027, to 1.3% from the 1.5% expected in January.

The IMF also downgraded the global economic growth forecast, revising it to 3.1% this year, down 0.2 percentage points from its January prediction.

Growth downgrade is a result of Iran war, says IMF

It comes after the war between the United States and Iran has thrown the global economy into turmoil, with disruption to the global oil supply being particularly damaging.

Kristalina Georgieva, managing director of the IMF, said: “Had it not been for this shock, we would have been upgrading global growth. But now, even our most hopeful scenario involves a growth downgrade. Why? Because of infrastructure damage, supply disruptions, losses of confidence and other scarring effects.

“Even in the best case, there will be no neat and clean return to the status quo,” she added.

The direct consequences of the war have led the IMF to forecast a rise in global inflation, fewer interest rate cuts across the globe, and higher energy prices that may continue for the rest of 2026 and beyond.

Each of these factors hurt the global economic outlook.

IMF: Higher energy costs set to hit UK living standards

Heightened energy prices are set to be one of the major obstacles households will have to contend with this year following the war.

That is particularly painful to hear as many have struggled to keep up with the price of energy since the 2022 energy crisis following Russia’s invasion of Ukraine.

Cornwall Insight, an energy consultancy, expects the typical energy bill for the average household to reach £1,861 in July, 13% higher than the current average thanks to elevated energy prices in the wholesale market.

These higher energy prices will feed into inflation, with the IMF now expecting UK price growth to head towards 4% in 2026, while unemployment is expected to reach 5.6%.

Rising inflation will hit UK households as the purchasing power of their income will fall.

What is more, high inflation is likely to mean the Bank of England will keep interest rates where they are, at 3.75%, forgoing a cut until 2027, according to many economists.

All these factors have resulted in the IMF also downgrading its living standards forecast for the UK.

The body now expects minimal change in UK living standards this year, as output per person is projected to increase by a barely-noticeable 0.3% per person, the lowest in the G7

The growth downgrade is particularly bad news for the government’s target of securing the highest sustained growth in the G7, which it promised as part of its election manifesto.

Lindsay James, investment strategist at Quilter, said: “The conflict in the Middle East has effectively blown a hole open in the economic plan the Labour government was embarking on, and without a significant calming of the tensions, the UK is expected to fare the worst of the world’s developed economies.

“The government came into this year hoping it would be one of stabilisation, with Budget concerns now out of the picture and the fiscal headroom being enlarged.

“The US-Iran war, however, has blown that off course and instead resulted in the UK suffering from increased energy prices and the potential for an inflationary shock. With interest rate cuts now firmly off the cards for now, and the potential for hikes very much live, economic growth is going to be hard to come by.”

What’s happening with UK energy prices?

Energy secretary Ed Miliband is set to approve the first major North Sea oil and gas project in almost ten years, says The Times. The licence to exploit the Jackdaw gas field, 150 miles east of Aberdeen, was granted under the previous Conservative government, but has been held up by legal wrangling.

Giving it the green light would not technically contravene Labour's ban on “new” drilling in the North Sea, but it would be a striking policy shift for Labour, and in particular for Miliband, a net-zero true believer.

Proponents say the energy shock caused by the Iran war has strengthened the case for drilling. Adura, the joint venture that owns the rights to the field, claims it could produce the equivalent of 6% of the UK's future gas supply.

Is that realistic?

Others are sceptical. Uplift, a lobby group, claims Jackdaw would have zero impact on our bills and do little to increase gas supply. Indeed, even if the UK extracted every last hydrocarbon from the North Sea, it “would not raise this country's long-term output of oil and gas by more than homeopathic amounts” and “would not move the needle on UK energy prices”, says Ambrose Evans-Pritchard in The Telegraph.

Oil is priced off the global market and the gas price would continue to track the international cost of liquefied natural gas – “unless we cut off our European inter-connectors, tore up our EU trade deal and retreated into energy autarky”.

Why are UK energy prices so high?

There are several reasons why UK energy prices are so high (we pay more for electricity than almost anywhere else in Europe). One is that, although the UK is getting good at producing renewable energy, it's terrible at scaling up its storage capacity. Despite improvements in battery technology, the UK's current capacity is negligible compared with the volume needed to affect electricity prices.

Another is geography and climate: while the price of solar power continues to plummet, wind power prices have plateaued, and the network costs of getting the power from the windy places (mostly northern and offshore) to the more populous ones are large. Green levies and other so-called “policy costs” make things worse, accounting for up to 11% of a typical bill for a dual-fuel household and 16% if it's electricity-only.

Another crucial factor is that we're a net importer of natural gas and highly vulnerable to external shocks. Moreover, our electricity prices are priced largely off the gas price, even though renewables now make up more than half the mix in terms of generating electricity.

Why is UK electricity priced off gas?

Because the UK – like almost all other developed, liberalised, economies – uses a “pay as clear” system of “marginal pricing” to match buyers with sellers so the market clears and overall demand is met by sufficient supply. In practice, that means that all power plants available to generate and sell electricity are continuously making “bids” to do so at a particular price. The bids are then arranged in a “merit order stack”, from the cheapest to the most expensive.

Because gas still makes up a big chunk of the mix, it is almost always the provider of the “marginal” unit of energy – the point at which the market clears and supply meets demand. One study found that in 2021, gas set the price of power 97% of the time, even though it generated only 37% of electricity. In France, where the market is dominated by nuclear, gas sets the price just 7% of the time.

Why not change the energy system?

We could, and there are various options. One is to move to a “pay as bid” model, where each power plant is paid the amount that it has bid to supply electricity, rather than the higher marginal price. But the risk there, says Simon Evans for Carbon Brief, is that all bidders (including cheap renewables) would seek to maximise their profit by bidding at the price they expect the market to clear, not at their own generation costs. As such, the system wouldn't lead to lower prices.

A second option would be to create two separate markets: a “green power pool” for renewables and another for conventional sources. This option was considered – and rejected as undeliverable – in the government's 2024 “review of electricity market arrangements”.

What other options are there for lowering UK energy prices?

A third, more radical, option for lowering UK energy prices would be to take gas out of the market completely. The sector would be managed as a strategic national reserve, receiving a regulated return for remaining open and available as a stand-by resource, while the rest of the market continues to use marginal pricing. It's doable, but would be politically very contentious.

The reality is that marginal pricing appears to be the “worst approach to clearing markets apart from all the others”, says Jon Ferris of consultancy LCP Delta. For the UK, where gas still sets the price, that leaves us stranded for now in a very expensive halfway house – bearing the capital costs of building a low-carbon system, while still paying the current fuel costs of the obsolescent fossil-fuel system.

What’s the solution to high UK energy prices?

In the absence of a new pricing mechanism for UK energy, some more pragmatism and less ideology would be a start, says The Economist. More than four-fifths of British homes still rely on gas for heating, far more than in the EU. So at some point, the commitment to hitting 95% clean electricity – renewables and nuclear – by 2030 is going to come unstuck.

In the long run, this is a sensible economic and geostrategic aim: the National Energy System Operator, which designs Britain's grid, projects that the country's energy-related costs (comprising transport, heating and electricity) could fall from 10% of GDP in 2025 to less than 6% by 2050 in a low-carbon world. We'd be much less vulnerable to external shocks. Yet even in 2050, the UK will still need gas as back-up. The government needs to recognise that and allow more North Sea exploration and drilling now. Even though it wouldn't bring down domestic prices, it would increase UK energy security and lend a fiscal hand, too.

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Recession is coming. Any hopes chancellor Rachel Reeves may have had of keeping her promise to make Britain the fastest-growing economy in the G7 have surely finally been dashed. Last week, the OECD think tank warned that Britain would be hit harder than any other

Britain's ideologically driven commitment to being the world leader in hitting net-zero carbon emissions means we already have to import most of our energy and prices are now rising out of control. Likewise, in February, retail sales fell back again, and that was before the impact of the conflict in the Middle East fed through to the data. Jaguar Land Rover temporarily suspended production at its Solihull plant over a supply issue, while shoe chain Russell & Bromley collapsed into administration, knocking out yet another high-street stalwart. It is hardly an encouraging outlook.

It is going to get a lot worse. The living wage went up on 1 April, rising by another 4.1% to £12.71 an hour, piling more costs onto employers. From the start of the new tax year, both companies and individuals will be hit with a whole blizzard of tax increases. Business rates will go up sharply as reliefs are withdrawn, with the vast majority of companies having to pay up regardless of whether they are making any money or not. Council taxes will go up, with a typical rise of 5% across England and Wales. The higher rate of tax on dividends and savings and rental income also comes into force, hitting anyone running a small business hard. Even more landlords will give up, making the rental market even worse than it already is.

Frozen tax thresholds will mean that even a modest annual pay rise, and one that barely keeps up with rising inflation, may well take you into a higher tax bracket, and mean that you end up with hardly any extra take-home income (and we all know what kind of impact that will have on incentives to work. Even air passenger duty will go up yet again, making it more expensive to get out of the country if you have had enough of all the other tax rises. The list goes on.

The rises are bad enough in themselves, but the real problem is the timing. Reeves has adopted a strategy of pre-announcing tax rises: in each Budget, she sets out a series of increases that will start to bite a year, or even two or three, out. To the officials at the Treasury, that may seem clever. It allows the Office for Budget Responsibility to say that the books will be balanced, at least one day in the future if not right away. It keeps the bond market happy, so long as no one digs too deeply into the numbers. It allows spending to be increased right away, keeping the backbenchers happy, and the actual pain of the tax increases is a long way off so no one complains about it too much.

Risk of recession means the chancellor needs to act

The trouble is, the moment when taxes go up steeply always arrives one day. The blunt reality is this: no one in their right mind would think that Britain in April 2026 is a country where everyone needs to be forced to pay more to the government. The economy has stagnated and is at risk of sliding into a recession. The Iran war means energy costs are exploding and the Bank of England may have to raise interest rates twice or more before the end of the year, instead of reducing them as had been expected.

Against that backdrop, you would expect the chancellor to be cutting a few taxes and announcing some targeted infrastructure spending to cope with any rise in unemployment, to try and support the economy. But it is too late to change course now. The plan has already been set and the machinery of taxation moves relentlessly forward, with zero flexibility and without any ability to respond as the outlook for the economy changes.

If the chancellor had any courage she would postpone many of the tax rises due to come into force this week. Instead, she would embark on a long-overdue review of public spending, identify savings, stop spending such insane amounts of money on welfare, and find a way to convince her party that the money had run out. She would, after all, have a convincing story to tell.

Unfortunately, Reeves is neither brave nor clever enough to attempt that. Instead, business and consumer confidence will be crushed even further – and a recession now looks close to certain.

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UK inflation: Summary

• The Office for National Statistics (ONS) has released the latest UK Consumer Price Index (CPI) measure of inflation data.
• It has remained at 3%, unchanged from January.
• Economists expected the February inflation data to remain at 3%.
• The data has been released as fears grow that inflation will surge in the coming months due to the conflict in Iran.
• The Bank of England (BoE) held interest rates at 3.75% at its last meeting in response to the growing threat of rising prices.
• UK inflation forecast | Interest rate predictions | Next Bank of England base rate meeting | New ONS basket of goods

Good afternoon and welcome to our live coverage ahead of the latest UK inflation data being published by the Office for National Statistics (ONS) tomorrow (25 March).

The latest Consumer Price Index (CPI) measure of inflation data will be released at 7am, covering the 12 months to February 2026.

In the 12 months to January, CPI inflation read 3%, down from 3.4% in December, marking the slowest annual rate of CPI inflation since March 2025.

Inflation for February is expected to come in around the 3% mark, according to economists.

Follow our live report here as we bring you rolling preview analysis ahead of the data being published, plus live reaction after it is released.

Economists expect inflation to have risen at same pace as January

Economists at research and consulting firm Pantheon Macroeconomics expect the February data to show inflation rising at 3% in the year to February, unchanged from January.

The firm is forecasting higher core goods inflation will offset lower motor fuel costs, with core CPI inflation set to remain unchanged year-on-year at 3.1%.

Meanwhile, it is forecasting services inflation to come in at 4.1%, down from 4.4% in January.

UK inflation since 2020

The CPI measure of inflation has broadly trended downwards since peaking at 11.1% in October 2022 following a surge in wholesale energy prices.

Global prices for gas, electricity and oil started to increase in the summer of 2021 when economies around the world opened up following coronavirus lockdowns. This increase was exacerbated by Russia’s invasion of Ukraine.

In September 2024, the CPI measure of inflation slowed to 1.7% before increasing to 3.8% in July 2025, but since then has slowed to 3% in January 2026.

Why does the ONS release inflation figures at 7am?

The ONS previously released key macroeconomic data at 9.30am and briefed some news agencies on the details beforehand.

However, it trialled a 7am release time during the coronavirus pandemic, a move it made permanent in March 2022.

The statistics body said it had decided to change the time indefinitely as it “increases the visibility and timely explanation of our statistics via the media” and made it more widely accessible to the public.

'The bigger concern is what happens next'

While the headline CPI inflation figure published by the ONS tomorrow is expected to remain roughly stable, a shock could be on the way due to the conflict in the Middle East.

The price of Brent crude oil has surged since the US and Israel first launched strikes on Iran on 28 February, disrupting shipping and leaving energy infrastructure damaged. A barrel of crude oil has gone from $72 on 28 February to $95 on 23 March.

Rising oil prices push up the price of petrol, transport costs and then consequently the cost of the weekly food shop.

Tamsin Powell, consumer finance expert at personal loan lender Creditspring, said: “The bigger concern is what happens next, as rising fuel and wholesale energy costs are already pointing to renewed pressure in the months ahead.

“Even if February’s CPI figure looks calm on paper, it may not reflect the pressures already building in everyday spending,” Powell added.

What do you think inflation will be in February?

Why rising inflation doesn’t always mean prices are going up for you

The ONS’ official measure for tracking inflation is the CPI, but even if it’s rising that doesn’t mean your cost of living has gone up.

The CPI measure tracks price rises across a virtual basket of roughly 750 goods and services, which changes once per year to keep up with market trends.

But that means the headline figure change might not reflect how much more you’re spending on a day-to-day basis.

For example, a teenager might be more impacted by price rises in video games than a pensioner.

We're going to end our coverage here for today, but keep an eye on this page where we'll bring you live reaction and analysis when the ONS releases its latest inflation data tomorrow.

Good morning and welcome back to our live coverage. The ONS is just about to release its latest inflation data, so stay with us for rolling reaction and analysis.

BREAKING - UK INFLATION REMAINED AT 3% IN FEBRUARY

Data from ONS today unsurprising

The data released by the ONS this morning is what was expected from economists.

The annual rate of CPI inflation has stayed the same as January, but it doesn’t reveal much about where prices, which are likely to be impacted by the war in the Middle East, might go in the future.

Rising clothing prices offset by slowing petrol costs

The ONS said rising clothing and footwear prices saw the headline CPI figure rise in the 12 months to February, but falling petrol prices offset the increase.

Prices also rose across furniture and household goods, but slowed across food and non-alcoholic drinks.

Grant Fitzner, chief economist at the ONS, said prices for petrol costs were collected before the conflict in the Middle East broke out, meaning they are likely to rise over the coming months.

Core CPI rises while services inflation falls

Core CPI, which strips out prices for more volatile items like food and energy, rose by 3.2% in the 12 months to February, up from 3.1% in January.

Meanwhile, the CPI services annual rate eased from 4.4% to 4.3%.

The Consumer Price Index including owner occupiers’ housing costs (CPIH), which includes council tax costs and is considered the most comprehensive measure of inflation, rose by 3.2% in February, unchanged from the 12 months to January.

February inflation figures a ‘false flag’ for the economy

While the February inflation figures released today might seem positive, they’re still over the Bank of England’s 2% target, which is set by the government.

Meanwhile, they measure price rises which happened before the conflict in the Middle East, which economists expect will have a significant inflationary impact over the coming months.

Sirun Thiru, chief economist at the Institute of Chartered Accountants in England and Wales (ICAEW), branded the February inflation figures a “false flag”.

Thiru added: “While inflation should fall next month (March) as the cut to green levies temporarily lowers energy bills, a brutal inflation surge looms with skyrocketing oil and gas costs likely to lift the headline rate above 4% by the summer.”

What does the latest data mean for interest rates?

Today's inflation data is unlikely to have much impact on interest rates in the near or long term.

The Bank of England’s Monetary Policy Committee (MPC) had been intending to lower interest rates in 2026 with inflation slowing, unemployment rising and the economy stagnating.

At the start of the year, the central bank was expected to lower rates twice in 2026, with the first coming in March.

But the conflict in the Middle East and its potential inflationary impact has, at least for now, given the MPC more pause for concern.

At its last meeting, ratesetters voted unanimously to hold interest rates at 3.75% rather than lowering them.

Andrew Bailey, the governor of the Bank of England, said holding interest rates was the “appropriate” thing to do with the threat of higher inflation looming and the knock-on effect this could have on consumers.

In the longer term, interest rates could remain at their current rates until well into 2027, according to advisory firm Oxford Economics, which has voiced concerns over elevated global oil and gas prices.

Inflation figures include supermarket scanner data for first time

This month’s set of inflation data is the first which includes prices tracked through supermarket scanners.

The ONS typically tracks prices by manually checking them in stores and shops, but now around 50% of the grocery market data is being tracked through scanners and online tills.

The ONS says the move will allow it to more accurately measure year-on-year price changes and find out how much of a particular item shoppers are buying.

A closer look at the figures

How inflation affects you depends on what goods and services you buy, so it helps to look at the data in a more granular way.

Here’s a breakdown of exactly how much prices rose across some of the main categories in the year to February.

A quick recap

If you’re just joining us, here’s a quick recap of what you’ve missed.

The CPI measure of inflation remained at 3% in the year to February, the ONS confirmed this morning, in line with economists’ expectations.

The CPIH measure of inflation also stayed the same as the month before, remaining at 3.2% in the year to February.

But experts are warning the data pre-dates the war in the Middle East, which is expected to put major upward pressure on inflation.

Savers should be ‘hunting down’ the best rates

Higher inflation can keep savings rates elevated, but it’s crucial your money is an account that’s paying out a rate above inflation.

The average savings rate on the market is currently paying 3.37% in interest, according to data website Moneyfactscompare, but if inflation rose to 4%, you would be losing money in real terms.

Caitlyn Eastell, personal finance analyst at Moneyfactscompare, said: “Settling for average won’t cut it, savers should be hunting down the most competitive rates. The top easy access account currently pays 4.71%, which puts savers ahead.”

Economists at Pantheon Macroeconomics believe inflation will peak at 3.6% in November 2026, but what do you think?

How does the UK’s rate of CPI inflation compare to other countries?

CPI data is the measure used to compare the UK's rate of inflation against other major countries.

According to the ONS, the UK’s rate of inflation was higher than the EU (2.1%), Germany (2%) and France (1.1%) in February.

The last time the UK rate was lower than the EU’s was December 2024.

When will March's inflation data be published?

The ONS publishes inflation data once per month.

It will be releasing the data for the month of March on 22 April.

That concludes our inflation coverage for today. Thank you for joining us. We will be back with more live analysis in the weeks to come.

High inflation is surprisingly hard to forecast. It's tempting to assume that the results of a major event – such as the current Middle East crisis – should be easy to predict. Yet while this must push up energy prices in the short term, it is not so simple to say whether it will drive sustained broader inflation. There are far too many factors involved, and it is often impossible to anticipate which ones will prove most important.

Consider that during the 2010s, many people – including most of MoneyWeek – expected that extreme monetary policy – including interest rates at zero and vast amounts of quantitative easing (QE) – must lead to a rapid resurgence in inflation. This very clearly did not happen.

Why? Maybe this inflationary force was offset by disinflationary forces such as globalisation (cheap imports from China), productivity gains through technology and falling energy prices from the US shale revolution. Maybe the overhang from the financial crisis and the eurozone crisis, combined with government spending curbs, kept the economy below capacity. Maybe consumers and businesses hoarding cash or a reluctance by banks to lend meant the huge increase in the monetary base did not result in a similar increase in broad money (ie, what's circulating in the economy).

That's already no shortage of explanations – and there are others, but this space is short. Which you prefer may depend on your taste in economics; none seem definitive.

Will the energy crisis lead to high inflation?

Jump ahead to the pandemic and the result was different. Central banks eased aggressively once more, but this time inflation soared within two years. Why? The energy price shock from Russia's invasion of Ukraine. The lagged effects of supply-chain disruption from the pandemic. Pent-up consumer demand and changing spending habits. A tight labour market pushing up wages. High levels of government spending, including money that went directly to individuals and businesses. Again, take your choice.

So we can't be too certain how this new shock will play out. Higher energy prices feel inflationary, but if they weaken the economy, the effect may be temporary. Central banks are less likely to sit on their hands this time, though you can debate whether tightening policy in the face of a supply shock is a sensible thing to do – maybe it just doubles the harm.

Set against that, the AI boom is hugely energy intensive, which may amplify the effects – unless, of course, the jitters in private credit start to squeeze the funding it needs for growth. But perhaps the key factor is that it now seems politically impossible for government spending to fall (the US has a 6% budget deficit in a booming economy) and this will surely be funded by central banks through QE if markets baulk. So my guess is that this energy crisis will be another upward shock for a world that already has an underlying bias. That doesn't mean double-digit inflation – but we are not getting back to central banks' 2% target soon.

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The Royal Navy's weakness exposed by the Iran war

Britain's failure to deploy the Royal Navy to defend its sovereign bases on Cyprus – attacked by Hezbollah drones on 1 March – has raised alarming questions over the readiness of Britain's military to project force overseas, and has shone light in particular on the sorry state of the Senior Service.

On Tuesday, the Type 45 Destroyer HMS Dragon was seen moored in Gibraltar, some 2,200 miles away from its intended destination, after it left Portsmouth last week. It was scheduled to arrive in Cyprus next Monday, some three weeks after the strike by Hezbollah (Iran-sponsored Lebanese militants) on RAF Akrotiri on the southern tip of Cyprus.

There is now no British presence in the Persian Gulf region for the first time in 50 years, and its Cyprus bases are unprotected. According to the former first sea lord, Admiral Lord West of Spithead, it reflects a Royal Navy that's now in its most “parlous state” for 60 years: too small, underfunded, and unable to deliver what the nation needs.

How big is the Royal Navy?

The Royal Navy fleet is 40% smaller than at the turn of the century and a fraction of the size of 50 years ago. In 1982, it deployed 127 ships for the Falklands conflict, including 43 warships. Today, the navy comprises just 13 principal surface combatants, namely six Type 45 destroyers (the only weapon in the UK's arsenal that can shoot down ballistic missiles) and seven Type 23 frigates. In addition, there are ten submarines, 26 patrol and coastal vessels, and two aircraft carriers.

That's 51 vessels (or “hulls”) in all – a smaller tally than at any point since the mid-17th century, according to James Smith, a war studies researcher at King's College London. And even that number rather overstates the navy's strength, says Larisa Brown in The Times.

In practice, three of six Type 45 destroyers are in deep maintenance and only three are deemed “operational”. Of the seven frigates, only three are operational and neither of the two £3bn aircraft carriers is at sea. In the past three years, both the navy's former amphibious assault ships have been scrapped, as well as five frigates, two minehunters and one attack submarine.

How does the Royal Navy compare to other countries?

The Royal Navy is unusual in that it has relatively few ships, but mostly big ones. In terms of vessel count, Britain is just outside the top ten largest navies (behind the likes of Japan, South Korea, Iran and Italy. China tops this list, ahead of the US).

But in terms of “tonnage” – by most reckonings a better measure of overall capacity and firepower – the Royal Navy ranks fourth, behind the US, China and Russia.

America's navy has 121 vessels in its surface fleet, comprising 11 aircraft carriers, 74 destroyers, 27 frigates and nine cruisers. China has 110 surface combatants, including three carriers, 48 destroyers, 51 frigates and eight cruisers. France's fleet is most similar in size to Britain's, though there's only one aircraft carrier and 17 frigates compared with our seven.

In terms of active personnel, the UK (32,150) now has a smaller navy than France (37,950). The comparable figures for the US is 340,250 and for China, 262,000.

Should the Royal Navy be bigger?

Maritime power remains crucial to protecting British interests, for multiple strategic reasons relating to trade, energy, communications and international alliances. The UK also has sovereignty over 14 overseas territories – stretching from the South Atlantic to the Pacific oceans – three of which neighbour key strategic chokepoints. So a powerful navy is important.

Ultimately, the question of naval power is a fiscal and political choice. If the UK is to meet all its strategic naval objectives – leading Nato against an aggressive Russia; enhancing its contributions to “sea denial” in the Indo-Pacific to dissuade an expansionist China; and protecting international shipping lanes – then yes, a larger navy is needed, argue William Freer and James Rogers of the Council on Geostrategy.

That doesn't just mean more vessels. It means addressing recruitment and retention to ensure the navy has the personnel it needs, and a clear message to the defence sector that a steady and predictable pipeline of procurement can be expected over the coming decades.

What happened to the Royal Navy?

Long-term complacency about the need to retain hard power in the post-Cold War era; dramatic cutbacks in shipbuilding and support infrastructure for the navy's conventional high-end fighting power; and the expectation – in a series of strategic defence reviews – that the US would underwrite British security, says James Fennell of the Centre for European Policy Analysis.

The UK is in the absurd position of having 50,000 civil servants in its Ministry of Defence, the highest number ever, but a navy numbering only around 20,000, once the Royal Marines are discounted.

It's also hard to overstate how “closely the Treasury is wedded to defence on the cheap”, says Fennell. Spending 2.3% of GDP on defence is grossly inadequate and the “dismal” Cyprus embarrassment should signal the end of this complacent era.

Should Britain spend more on its defence forces?

It's supposed to be. The UK should “restore the strength of our conventional armed forces, fill in vital gaps in our defences and become a home of thriving, high-tech new defence firms”, says William Hague in The Times. That would “give us leverage with those occupants of the White House we can rely on and help us survive the tenures of those we can't”. But despite public pledges, funds are not flowing. Dithering over the Defence Investment Plan has gone on for months, with firms describing the speed at which purchases take place as “glacial”. The government has committed – as part of a Nato agreement – to raise defence spending to 3.5% of GDP by 2035 and has already set out the path to hit 2.6% by 2027. In practice, though, the proportion of national income spent on defence and materiel, stripping out pensions and similar items, is expected to fall next year to 2.13%.

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Sometimes it seems we are too hard on Rachel Reeves. Yes, she is a bad chancellor: anti-business with no coherent vision for getting the economy growing and no backbone when she is pushed by her party. On the other hand, it has been seven years since Britain had at least a semi-competent chancellor, and she has inherited a catastrophic mess that would be a gigantic challenge even for an outstanding one.

One might briefly feel that she deserves some support as an under-qualified person trying to do an impossible job at the head of a sclerotic Treasury that needs to be broken up and rebuilt. Then you look at her proposed changes for individual savings accounts (ISAs) and all sympathy goes right out the window.

A brief history of ISA rules

To see why these ISA rule changes are so misguided and why they show Reeves and her team to be truly clueless about investing, let’s go back to when ISAs were first launched back in 1999. The ISA rules then were much more restrictive.

You could pay up to £7,000 into a “Maxi Stocks & Shares ISA” each year, or up to £3,000 into a “Mini Stocks & Shares ISA”, up to £3,000 into a “Mini Cash ISA” and up to £1,000 into a little-used “Insurance ISA” that let you put money into with-profits funds from an insurance company (which in theory was supposed to be less volatile than investing directly in the stock market). You could transfer from a cash ISA to a stocks and shares ISA, but not the other way round. Interest on cash held in stocks and shares ISAs was taxed at 20%. Investments had to have a credible possibility of losing at least 5% of the capital. Bonds had to have at least five years remaining until maturity when they were purchased.

There were a few tweaks through the years before 2014 when then-chancellor George Osborne greatly improved the ISA rules: a higher annual limit of £15,000 could now be split between a cash ISA and a stock and shares ISA in whatever proportions you liked. Money could be freely transferred between both. Cash interest was no longer taxed in a stocks and shares ISA, and low-risk cash-like investments were allowed.

This was a huge step forward. Subsequent changes to ISA rules include flexibility, allowing you to take out money temporarily and put it back again without affecting your annual allowance. You can also now contribute to more than one ISA of each type each year. Today, the ISA is probably the best account of its kind in the world and has inspired similar products in other countries.

Set against this, new types of ISA added complexity. The Help to Buy ISA was a counterproductive attempt to solve the housing affordability crisis that is now a legacy zombie product. The Lifetime ISA's potential as a flexible retirement savings tool was weakened by overly tight age limits and by withdrawal penalties. The Innovative Finance ISA has been too niche for most investors. So further reforms were overdue.

What should happen is the merger of most types of ISAs to create a flexible general-purpose wrapper. All providers could choose what to offer in the wrapper – including cash, investments and innovative finance products – according to what kind of customers they wanted to serve. Lifetime ISAs would probably remain as a separate product with similar flexibility, but open to a wider age range, with fairer withdrawal rules and the ability to transfer in stranded Help to Buy ISAs.

Rachel Reeves's ISA rule changes would be a retrograde decision

Instead, Reeves and the Treasury came to believe that restricting the ability to hold cash would encourage more money to go into the UK stock market. So, unless there is a change of heart, ISAs will take a huge step backwards from April 2027.

Cash ISAs will have a lower annual contribution limit (£12,000 versus £20,000). You will be able to transfer from a cash ISA to a stocks and shares ISA, but not the other way. Cash-like investments such as money market funds will no longer be allowed in stocks and shares ISAs. Interest paid on cash held in stocks and shares ISAs will be taxed.

In other words, we are returning to many of the pre-2014 ISA rules. The degree of stupidity required to attempt this cannot be overstated. Whoever came up with this proposal does not appreciate what investors and savers need and has ignored all the clear benefits that previous reforms delivered.

MoneyWeek would be the first to agree that there is a problem with attitudes towards investing in Britain, but the current ISA rules have nothing to do with that. Quite the opposite: at present, you can put money into as many cash ISAs or stocks and shares ISAs as you like, transfer between them freely, and hold investments then move to cash in the same account if you are nervous about markets or you need to reduce risk. This flexibility is reassuring. Your money does not feel trapped.

Trying to coerce people to invest by restricting cash ISAs is not going to work. They will simply hold cash in taxable accounts instead rather than take risks they don’t want. Much more plausible reasons why people in the UK are unwilling to invest are i) regulators that have been far too keen to talk up the risks of mainstream investments while doing far too little to crack down on unregulated scams and ii) the ongoing national obsession with property.

Depressingly, Reeves’ other proposed ISA rule changes also include plans to end the Lifetime ISA and bring in a new Help to Buy ISA. Whether this will increasingly leave existing Lifetime ISAs as a zombie product, like the original Help to Buy ISA, remains to be seen. Regardless, it would clearly be another retrograde decision. And if the stock market remains moribund, it can only be a matter of time before the immensely idiotic idea of a “British ISA” limited to UK stocks – or, even worse, restricting international investments in all ISAs – also gets resurrected.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

Summary

• The Bank of England’s Monetary Policy Committee (MPC) held UK interest rates at 3.75% today.
• The move came as war in Iran has complicated the picture, with economists worrying it could lead to rising inflation.
• Before the war, most forecasters expected the Bank to cut rates.
• When the MPC last met in February, it held rates at 3.75% – though the vote split, at 5-4, was narrower than many expected.

| UK inflation forecast | MPC meeting dates | Is the UK heading for stagflation? |

UK interest rates to be decided

Good afternoon, and welcome to rolling coverage ahead of the latest UK interest rates decision from the Bank of England’s Monetary Policy Committee (MPC), which will be announced tomorrow.

There is plenty of uncertainty ahead of the announcement. Three weeks ago, most experts were predicting a cut, especially given how narrowly the committee voted to hold UK interest rates at 3.75% last time it met.

But the conflict in the Middle East has thrown these forecasts up in the air. Given the unpredictable impact of the war on inflation, many experts now believe the MPC will wait to see what happens and hold rates – while some even believe it could raise interest rates in order to stave off any resurgent inflation.

Whatever happens, we will bring you rolling views and analysis before the decision, breaking news as it happens, and reaction and analysis afterwards.

When does the MPC meet to decide UK interest rates?

The MPC meets today – possibly as you’re reading this. But the results of its meeting are announced tomorrow.

The announcement will include details of what each of the nine members of the MPC felt about the next UK interest rate decision, as well as how each voted.

The announcement will be made at 12pm on Thursday 19 March – make sure you join us live as we announce the result.

When did UK interest rates start falling?

Interest rates in the UK have been on a downward trajectory for some time now, with the Bank of England starting this most recent cutting cycle in August 2024.

Before rates started being cut, the base rate rose from 0.25% at the tail end of 2021 to 5.25% in summer 2023 as the Bank responded to soaring inflation in the wake of the 2022 energy crisis.

Since the summer of 2024, rates have been falling slowly and gradually, with the MPC’s watchwords for much of this time being “gradual and careful”.

A total of six rate cuts have been made since, bringing the base rate to 3.75% at the MPC’s December 2025 meeting.

At the following meeting in February 2026, the committee made an overt signal that it wanted to cut rates further as inflation was forecast to return to the 2% target quickly, saying: “On the basis of the current evidence, Bank Rate is likely to be reduced further.”

However, now war in Iran is threatening the UK economy, it seems hopes of a further reduction on Thursday are far-fetched.

Will tomorrow’s interest rate decision finally unite the MPC?

Members of the MPC have been especially divided in recent meetings, with a much larger split appearing between the committee’s doves and hawks.

In four of the five most recent meetings, votes to cut or hold rates have been split 5-4, leaving Bank of England governor Andrew Bailey to cast the deciding vote.

A main source of division at these meetings was the UK inflation outlook, with doves making the case that disinflation was going in the right direction, justifying further interest rates cues.

Meanwhile, more hawkish members treated the inflation statistics with more caution, arguing that disinflation needed to make more progress before a cut could be made.

But with the UK potentially set to experience an economic shock due to conflict in the Middle East, a clearer consensus may emerge at the March meeting, with most economists expecting the MPC to hold rates where they are.

Bank of England expected to hold UK interest rates at 3.75%

The consensus expectation ahead of tomorrow’s UK interest rate announcement is that the MPC will hold rates where they are, at 3.75%.

This is largely because of the potential fallout from the oil price rises that have occurred since conflict broke out in the Middle East. Oil prices rose to close to $110 per barrel earlier today.

“The global economic landscape has become increasingly complex in recent months, with geopolitical tensions impacting financial markets and consumer confidence,” said  Aaron Shinwell, chief lending officer at Nottingham Building Society. “While interest rates had been on a gradual downward trajectory, the ongoing situation in various regions has introduced a high degree of uncertainty.

"The expectation is that the Bank of England will maintain the current base rate of 3.75% this week,” Shinwell continued. “However, the path forward is far less clear beyond that.”

UK interest rate-setters: who is on the MPC?

The Monetary Policy Committee has nine members, and between them they decide UK interest rates every six weeks.

They are:

• Andrew Bailey, governor of the Bank of England;
• Sarah Breeden, deputy governor, financial stability;
• Clare Lombardelli, deputy governor, monetary policy;
• Huw Pill, chief economist;
• Dave Ramsden, deputy governor, markets and banking;
• Four ‘external members’ that are appointed directly by the government: Swati Dhingra, Megan Greene, Catherine Mann and Alan Taylor.

In theory, this gives the MPC a well-rounded balance of expertise and perspectives.

What are the chances of a UK interest rate hike?

There have been suggestions that instead of holding interest rates, the MPC will vote to hike them.

The argument in support of a hike is based on the view that the war in Iran will lead to a resurgence of the high inflation the UK experienced in 2022. The MPC should therefore, they say, hike rates as a precaution to guard against returning inflation.

There is some merit to this view. Most forecasters think a prolonged war in Iran will lead to increased inflation in the UK – particularly through heightened energy prices.

However, in the view of Sanjay Raja, chief UK economist at Deutsche Bank, energy inflation alone is probably not enough to provoke a hawkish pivot.

The present situation is not the same as the 2022 energy crisis, he says. Then, the economy was on the rise, fiscal policy was loose, the labour market was tight, and monetary policy was accommodative.

“Today,” Raja said, “the world has changed. Fiscal policy is tightening rapidly. The UK is set to see the biggest fiscal consolidation (on paper at least) among G7 countries. Monetary policy... remains restrictive at 3.75%. Growth has stuttered to a near standstill.”

Raja added that these changes in how the economy operates mean that “while the rise in inflation (and inflation expectations) may curb further rate cuts, the MPC may be more minded to wait on the sidelines as the dust settles on the Iran conflict.”

Over to you – what’s next for UK interest rates?

We’re going to pause live reporting here for this evening, but don’t worry - we’ll resume tomorrow morning to bring you more previews and analysis ahead of the MPC’s UK interest rates decision announcement.

In the meantime, have your say: what do you think the MPC will decide? Let us know in our poll.

UK interest rates recap

Good morning, and welcome back to live coverage ahead of the announcement of the latest UK interest rate decision from the Bank of England’s Monetary Policy Committee (MPC).

Here’s a quick recap of the key details:

• The decision will be announced today at midday.
• Most experts previously expected the MPC to cut rates from 3.75%; however, the outbreak of the war in the Middle East has made this unlikely.
• While some have suggested the MPC could instead hike rates, most experts think the MPC will hold rates at their current level, enabling them to wait and see what happens with the fallout from the conflict.

We’ll bring you further previews and analysis this morning, as well as live coverage of and reaction to the decision’s announcement.

ONS shows labour market weakness ahead of UK interest rates announcement

Unemployment held steady at 5.2% in the three months to January, remaining at a five-year high, new data from the Office for National Statistics (ONS) shows.

Meanwhile, wage growth slowed in the same period to 3.8% for regular earnings (excluding bonuses) and 3.9% for total earnings (including bonuses).

While in calmer times this would be a good indicator that the Bank of England is able to cut interest rates without stoking inflation, the war in Iran will overshadow the data.

Rob Morgan, chief investment analyst at Charles Stanley, said any notion of cutting rates because of the softer labour market has been “rapidly extinguished by a surge in energy prices” that could potentially keep inflation north of 2.5%.

“The Bank of England is now very much stuck between a rock and a hard place," Morgan continued. “On the one hand, growth is at a crawl and there is slack in the labour market, but on the other a fresh pulse of inflation is set to hit households and businesses.

“In other words, the UK is in danger of experiencing the worst of both worlds: above-target price rises and an economy teetering on the brink of recession – “stagflation” in economists’ parlance – and there aren’t many levers left to pull to prevent it.”

Near-unanimous decision to hold UK interest rates expected

Despite recent division among members of the MPC, today’s interest rate decision is expected to pass almost unanimously, experts say.

Matthew Ryan, head of market strategy at financial services firm Ebury, said: “The bank will no doubt say that the Iran war and spike in oil prices have introduced significant upside risks to UK inflation, although it will be too soon for the bank to offer any real forward guidance.”

Ryan expects a motion to keep rates at 3.75% will pass by 8-1 or 7-2 as the MPC completes a hawkish pivot with minimal dissent.

Though markets are pricing in a 25 basis point hike by the end of 2026, Ryan said this view is “excessive for now, as it is not at all clear whether the supply side shock will be enough to trigger wage pressures of a de-anchoring in inflation expectations.”

He added that, as recent domestic economic news has not been overly favourable – including labour market data – the MPC “will not want to rule out the possibility of further cuts down the road should the Iran war resolve itself faster than currently anticipated.”

UK wage growth at lowest level in five years

UK wages grew at their slowest pace for five years in January, according to this morning’s ONS figures.

“Regular wage growth is at its lowest rate in more than five years, with pay growth in both the private and public sectors continuing to ease,” said Liz McKeown, director of economic statistics at the ONS.

Despite the worsening economic conditions, the MPC is unlikely to announce a cut to UK interest rates, without knowing how severe the inflationary impact of the Middle East war could become.

UK interest rates decision to be announced imminently

The MPC’s interest rates decision will be published at 12pm, and we will be covering the result along with reactions and expert analysis.

BREAKING: UK interest rates held at 3.75%

Interest rates have been held at 3.75%, in line with most expectations as war in Iran scuppered hopes of a rate cut.

More detail will be revealed in the minutes of the MPC’s interest rates meeting, so stay tuned as we digest the data.

MPC voted unanimously to hold UK interest rates at 3.75%

All nine members of the MPC voted to keep rates at 3.75%, as conflict in the Middle East led to a rare unanimous consensus among all members of the committee.

Some experts had forecast rate-setters to pass the motion by 8-1 or 7-2, but it seems the potential inflationary consequences of the war in Iran swayed even the most dovish MPC members to hold.

Middle East conflict the driving factor behind UK interest rate hold

In the summary to its interest rates decision, the MPC acknowledged that conflict in the Middle East has led to a “significant increase” in energy and other commodity prices.

The conflict jeopardises previous inflation forecasts, including the Bank’s own, which expected price growth to return to close to 2% this quarter. They now expect inflation to be higher in the near-term.

The MPC added that the longer energy prices remain high, the greater the inflationary risk to the UK.

The committee said it is also “also assessing the implications for inflation of the weakening in economic activity that is likely to result from higher energy costs.

“The Committee will continue to monitor closely the situation in the Middle East and its impact on global energy supply and energy prices. It stands ready to act as necessary to ensure that CPI inflation remains on track to meet the 2% target in the medium term.”

UK interest rates still at their lowest since February 2023

Despite rates being held, they are still at their lowest level in years.

The last time interest rates were below 3.75% was more than three years ago in February 2023.

We may have to wait some time to see interest rates fall further, as the MPC contends with the economic shock from the Iran war.

No UK interest rate cut likely until Middle East picture clears

Given that the energy price shock that followed the Ukraine war is still fresh in mind for central banks, it seems as though the Bank of England will be cautious about cutting UK interest rates until the fallout is clearer.

“The Bank shelved its planned rate cut at today’s meeting as surging energy prices threaten to reignite inflation,” said David Rees, head of global economics at financial services firm Schroders.

“Much will now depend on how high energy prices go, and for how long they remain elevated,” Rees continued. “But the current levels of oil and gas prices are already enough to add around 1% to headline inflation in the coming months, while shortages of fertilisers could push food inflation higher later in the year.”

With the conflict worsening, though, Rees highlighted that there is an added risk of an extended price shock. If that transpires, it could keep inflation above target for the foreseeable future – squeezing real incomes and threatening to push the economy into stagflation.

MPC: Energy supply disruption expected even if conflict ends soon

In its latest meeting, the MPC discussed the outlook for global oil and gas prices, noting that there were “upside risks to oil and gas prices looking ahead.”

It added that even if the Iran war ends quickly, the energy supply would still “take time to recover”, pushing up prices.

The committee said: “Efforts to rebuild stocks, as well as greater awareness of vulnerabilities in the global energy network, could sustain higher oil and gas prices. Distributions implied by financial market options also suggested that upside risks to oil and gas prices had increased significantly, at least over the next few months.”

Energy price inflation could push CPI to 3.5% in Q3

Higher wholesale energy prices could push inflation up by as much as 0.75 percentage points in the third quarter of the year, the MPC said.

While consumers will be protected from heightened prices until the end of June, thanks to the Ofgem energy price cap, they could be hit by higher bills from July onwards if current wholesale conditions persist.

The minutes said: “Based on the oil and gas futures curves as of 16 March, Bank staff projections suggested that the direct contribution of energy prices to CPI inflation in 2026 Q3 would be around ¾ percentage points.”

This rise, taken together with an assumption that firms will pass on higher energy costs to consumer prices, is forecast to push inflation up to an average of 3.5% in the third quarter of 2026.

Next rate decision will react to developments in Iran war

The next interest rates decision, due on 30 April, is set to be a reaction to the scale of the economic shock resulting from the Iran war, the MPC meeting minutes indicate.

They showed members "agreed that developments over the next six weeks could shed light on the likely scale and duration of the conflict, as well as providing some early evidence on the likely propagation of the shock.”

If there is a larger shock that risks greater second-round inflationary effects through wage and price setting, the MPC would need to adopt “a more restrictive policy stance.”

Conversely, the MPC said if the shock is “very short-lived, or if there were to be a larger opening up of slack in the economy that was expected to reduce medium-term inflationary pressures” then monetary policy would need to be “less restrictive.”

They added: “The MPC would act as necessary to ensure the 2% target was met sustainably.”

UK interest rates recap

As a recap, here’s the main talking points following the latest MPC meeting:

• UK interest rates were held at 3.75%.
• Markets had priced in a rate cut ahead of the outbreak of the war in the Middle East, but oil price rises and their potential inflationary impact have prompted the MPC to pause.
• The decision was reached via a rare unanimous vote from the MPC’s nine members.
• The MPC has said that it will base its next interest rate decision (due 30 April) on what transpires in the conflict in the meantime, as well as developments in the UK economy.
• UK wages grew at their slowest pace for five years in January, according the latest ONS figures, exacerbating the dilemma the MPC faces.

What does the interest rates hold mean for savings rates?

Savers will be able to benefit from higher savings rates than they would have if the MPC had voted to cut rates.

Savings rates have been falling since the Bank of England started cutting rates in 2024, with top rates slowly disappearing from the market.

Had the MPC voted to cut rates today, as many expected before the Iran war erupted, savings account rates would have likely been cut too. But as rates have been held, we can expect savings rates to stay broadly where they are.

The top savings account on the market at the moment is Chase’s saver with boosted rate, which grows your cash at a rate of 4.5% for 12 months. After a year, the rate drops to 2.25%.

What does the interest rates decision mean for your mortgage?

Mortgage rates have been slowly creeping up this month as the market adjusts to the Iran war.

On 18 February the average mortgage rate was 4.91%. By 11 March, it crept up to an average of 5.04%. Then, as it became clear this war was not going to be as quick as many hoped, rates climbed to an average of 5.29% by 18 March.

That may be surprising considering the Bank of England has not hiked rates. But the way banks price mortgage deals is more complicated than just following the base rate and adding a couple percent on top.

Instead, lenders price their mortgage deals by anticipating what the Bank of England will do ahead of time. So, as almost everyone expected a cut before the conflict in the Middle East broke out, lenders priced their mortgages more competitively.

However, once it became clear that the UK economy will be negatively affected by the war, with inflation probably set to rise, lenders started betting that interest rates will be hiked in response.

That is why new mortgage deals are higher today despite rates being held at the same level they were in December.

Oxford Economics: UK interest rates could stay at 3.75% until late 2027

Interest rates could be held at 3.75% for the foreseeable future as the MPC will hunker down for a period of heightened inflation, according to new forecasts by advisory firm Oxford Economics.

The firm expects the MPC to keep interest rates where they are until well into 2027, with a cut potentially on the cards by the end of next year.

Its previous forecast saw rates falling throughout 2026 and early 2027 until they settled at around 3%.

The reason for such a dramatic revision is – you guessed it – the economic impact of the Iran war on the domestic economy.

In particular, Oxford Economics is concerned that global oil and natural gas prices will stay higher for longer than other forecasters think.

It expects Brent crude oil prices to average $113 a barrel in the second quarter of the year and the Ofgem energy price cap to rise by 19% in July. The consultancy thinks this will cause CPI to rise to just above 4% in the second half of 2026.

Andrew Goodwin, chief UK economist, said: “We think the most likely outcome is that the MPC settles into a long period of unchanged rates.

“If our oil and gas price assumptions are in the right ballpark, given the concerns about inflation expectations we think the committee will be reluctant to loosen policy again until three factors align: headline inflation has dropped back to the 2% target; there are signs that core inflation is under control; and the MPC is content that pay growth is close to a target-consistent pace. Under our baseline forecast, these conditions would only be satisfied in H2 2027.”

Thank you for following our coverage of today's base rate announcement. We're going to end our live reporting here, but keep an eye on the Moneyweek website and newsletters for further updates and analysis on the outlook for UK interest rates.

Matthew Partridge: James Caan – you founded Alexander Mann and co-founded Humana International, two successful recruitment companies. Would you say that today there's a risk that many university graduates heading into entry-level roles today are being replaced by AI?

James Caan: While I feel much depends on what type of degree the student gains and what they want to do, I do think we're heading for a car crash. I talk to a lot of the big corporate employers, such as Goldman Sachs or KPMG, and if you look at the graduate intake this year, it's going to be less than 50% of the previous year's level.

Up until now, the basic entry-level graduate would have done a research-oriented job. But research is now available at the click of a button, removing the need for someone sitting there for hours trawling through documents and information. Even law firms have significantly reduced their intake, with many of these jobs set to be phased out altogether.

Matthew Partridge: Won't eliminating these entry-level jobs make it harder to find tomorrow's managers and executives?

James Caan: It might, but I think the whole concept of management will change. After all, so much of it is about managing businesses through information, and now access to information, whether financial or operational, is going to be on steroids, both in terms of increased quantity but also accessibility. This, in turn, will drastically reduce the need for managers. What's more, the managers who remain will be much more analytical and data-orientated than today's people-orientated managers.

If you take the three largest recruitment companies in the world, Adecco, Randstad and Manpower, you can see that their share prices have crashed over the last two years. This suggests that the market doesn't believe that the number of jobs they will fill, as well as the fees that they generate, will be anywhere near where they used to be, so my outlook for the job market is very bearish.

Matthew Partridge: So what sort of degrees should students looking to get a job after university do?

James Caan: Unless they want to follow a specific path, such as medicine, I don't think it is possible to generalise. However, I would say that degrees involving learning to work with data, whether through physics, maths or science, are going to be much more valuable. It is also important to realise that education is about more than just getting a degree; it's about capability, confidence and critical thinking. I left school at 16 because I wanted to get on with building something. Later, I went to Harvard because I wanted to sharpen what I had learned through experience. Both experiences were “education”. At the very least, the career departments of universities and schools need to reflect the careers of today with the advice they give students.

Matthew Partridge: You've been vocal about the need for change in the education system through your work with the Foundation for Education Development (FED). What sort of reforms would you like to see?

James Caan: Education is a very sensitive subject for me because I feel passionately that the UK's education system has not kept up with the times, with students that are coming out of schools ill-equipped for the jobs that exist today. The key problem is that the education system dates back to the 1950s idea of GCSEs and A-levels leading on to university, even though the economy has changed dramatically over that period. The problem is made even worse by the fact that many teachers working today were trained 25 years ago, which means key aspects of their skill sets can't meet the needs of today's students.

When I talked to various people about incorporating technologies such as AI or animation into classrooms, they all say “It's a great idea, James, but we don't have the resources within the education system to deliver those courses because the teachers are just not equipped”. What is particularly worrying is that the [Persian] Gulf and China are way ahead of us in terms of using AI and technology to provide advanced education at schools and universities, and their offerings are starting to overtake what's available in our institutions. Even Oxford, Cambridge and the LSE are falling behind, which means that they, and the country, could lose their income from overseas students.

Matthew Partridge: Is the solution to bring more money into education, or change the way in which education is delivered?

James Caan: The discussion has shifted towards skills, apprenticeships and employability, not just academic routes. The decision to refocus public funding away from master's-level apprenticeships is a clear signal of intent: prioritise earlier-stage, broader access to training. We also need to deliver lessons better. Thanks to AI, even when the teacher isn't qualified to deliver a topic, you can now design bespoke courses, using content culled from world-class institutions, which can then be delivered by virtual avatars.

So, for instance, I've always been a big fan of teaching students the basics of personal finance, such as owning a credit card and opening a bank account, right through to the mechanics of setting up a company and issues such as limited liability. Yet when I've raised the issue, the big objection has always been that many of those teaching in schools today don't know that much about those topics either.

The good news, though, is that thanks to the explosion in information, there's so much content available that it should be relatively easy to design a course and program an avatar to deliver a lesson for 30 minutes, with the teacher dealing with any further questions that the pupils might have. While this might seem futuristic, I'm already seeing schools in the Gulf and China using such technology in this way.

Matthew Partridge: You were a presenter on Dragons' Den, a TV programme credited with promoting entrepreneurship. Do you think that we're becoming more entrepreneurial as a society?

James Caan: Dragons' Den did something very powerful. It normalised entrepreneurship. It showed people from all backgrounds that starting a business was not reserved for a particular class, education or network. It made business conversations part of mainstream culture. That visibility matters enormously because you cannot aspire to what you cannot see.

Historically, we have had a cautious culture. We are more comfortable with security than risk. To fail in business still carries a stigma here that it does not in the US or the Middle East. But this is changing. Younger generations are far more comfortable with enterprise, side businesses, and alternative career paths. The cultural shift is happening, but the system has not yet caught up with the ambition.

Matthew Partridge: A big criticism of British entrepreneurship is that those who do set up companies still focus more on selling themselves to larger groups than growing into global champions. Is this true, and if so, what are the reasons for it?

James Caan: There is a lot of truth in that. Access to sufficient capital to achieve scale in the UK is still more limited than in the US. Founders receive acquisition offers earlier than they should, and without the right support, selling can feel like the rational decision. But I also think Britain can change this if it gets serious about confidence and long-term growth. When sentiment improves, companies invest more, and founders hold their nerve. The January business readings show we are not there yet, but the direction matters.

We need patient capital, better advisory systems, and a culture that celebrates building enduring companies, not just quick exits. A great example of the sort of thinking required is Amazon. At present many listed firms think in quarterly cycles because they have to report every three months and therefore the time horizon for investment is very short. However, Amazon held fast to its view that they needed to invest in order to build a world-class platform that would make them and their investors' a lot of money. While this meant that Amazon received a ton of negative press until the platform was built, it quickly became one of the most successful firms in the world, showing the benefits of thinking a bit more longer term.

Matthew Partridge: The government has recently talked about trying to reduce the amount of red tape around business. Do you think that will work?

James Caan: Yes, we definitely need to reduce red tape. I mean, try opening a bank account tomorrow or getting a VAT or PAYE number. One of the companies I set up recently took five months to get a VAT number. It's just ridiculous. And the awful thing is that, with all today's technology, we should be able to do this online. How is it that I go to Barclays and it can take me four months to open an account, but I can open one with a fintech such as Revolut in ten minutes?

Some of the decisions that the government has taken haven't helped. The decision to hike national insurance was particularly ill-thought through; it looks as though the Treasury may end up losing money because of the reduced number of hires. Similarly, the tax hikes on some of the wealthy have resulted in people leaving the country. I don't think that the government understands how to implement policies to boost business and entrepreneurship.

Of course, I'm not against all tax rises, especially if they are used to fund retraining for workers displaced by AI. It might make sense to target the huge technology companies that are causing all the problems. However, by hiking employers' national insurance contributions to 15%, the only thing that you are going to do is to kill all the small companies.

James Caan CBE is the founder and CEO of private-equity firm Hamilton Bradshaw as well as chairman of both Recruitment Entrepreneur and Ingenia Global Partners. Between 2007 and 2012, he was on the panel of Dragons' Den. He has written four books on business.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

The government is hoping that the creation of pension mega funds could boost the UK economy and reduce fees for investors, but experts warn that risks remain.

New pension reform legislation currently going through parliament aims to shake up the way defined contribution (DC) schemes invest.

The Pension Schemes Bill wants to create mega funds that merge smaller multi-employer schemes, known as master trusts. The Bill is currently going through Parliament.

The idea is that these will invest in assets such as infrastructure to boost the UK economy.

The legislation also requires these master trusts to be a minimum scale of £25 billion by 2030 and threatens to ‘mandate’ them to invest in British private investment markets if they don’t meet a minimum threshold.

The Bill also creates a ‘value for money’ framework designed to help trustees assess how a scheme is performing and to force the consolidation of smaller schemes.

The Treasury claims that the move to pension mega funds - inspired by the success of similar schemes in Australia - will give savers a 0.06% reduction in fees.

But a new report from former pension minister Steve Webb, now a partner at consultancy LCP, compiled with Frontier Economics warns that these interventions could actually impact the performance of pension schemes, ultimately reducing returns for savers.

Here are the main concerns raised about the government’s pension reforms.

Master trust changes

There are around 30 master trusts in the UK.

These make it easier for employers to set up a scheme by just joining one that works for several companies at once.

The government is looking to force consolidation by stating that the main default fund in a master trust should be at least £25 billion by 2030.

The aim is to create a smaller group of larger master trusts that can then help fund UK economic projects.

This is inspired by the success of superannuation schemes in Australia, where the largest providers have assets worth hundreds of billions.

In contrast, big multi-employer schemes in the UK such as NEST have assets of £50 billion.

But the report warns that the overall impact may be marginal given that the DC master trust market is already relatively concentrated.

It adds that it takes time to build scale and the mandatory Australian system has been around since the 1990s, while auto-enrolment and the rise of DC schemes only started in the UK in 2012.

Webb said: “We need to move away from spurious comparisons with the pension systems of other countries when deciding what is right for the UK.

“The Australian DC system in particular is currently far larger and far more mature than the UK system and this will inevitably lead to a different investment mix compared with the UK’s smaller master trust sector.”

Investing in private markets

The legislation includes a reserve power for the government to mandate how master trusts invest, with an aim to boost private UK investment markets - known as productive finance.

But the report warns that smaller pensions face barriers to being able to do this due to a lack of public information .

The paper argues that there is no clear case either for the government to override the judgments of trustees acting in the interest of members or for setting arbitrary top-down targets.

Webb added: “The UK investment mix will in any case shift rapidly in the coming years, as UK DC schemes grow rapidly, and the government should not be in the business of over-riding trustee decisions to impose what it thinks is the right answer.”

Value for money framework

The Financial Conduct Authority (FCA), the Department for Work and Pensions (DWP) and The Pensions Regulator (TPR) have published proposals aimed at encouraging workplace pension schemes to improve their performance.

Under the proposed changes, pension schemes will need to publish clear data on their performance, costs and quality of service based on a ratings system giving each a Value for Money score.

If a pension is deemed to offer poor value, firms and trustees must then fix it by moving staff to better schemes or by making improvements.

But the report warns that ‘league tables’ could be counterproductive, leading to ‘herding’ of investment strategies with schemes reluctant to step away from the pack’ and innovate.”

Paul Johnson, senior adviser at Frontier Economics, said: “We need a rigorous framework to assess value for money, making sure that interventions are laser-targeted on areas where market forces alone will not deliver the right outcomes.

“The appropriate interventions will depend on the specific market failures we need to tackle and not on some arbitrary top-down target.

"Governments should act with great humility for fear of reducing the value of people’s pensions.”

Steve Webb was a guest on the MoneyWeek Talks podcast, where he discussed the state pension triple lock, using pensions for property, and more.

As the oil crisis gathers momentum, it remains to be seen how events play out in the Persian Gulf – a ceasefire might be agreed with Iran and the shipping lanes might start to reopen, as might the production facilities. But as the week started, it did not seem likely. Oil spiked over $100 a barrel, and across Europe, natural-gas prices more than doubled. By Tuesday morning, they had started to fall again. And in real terms, $100 is not in any cases all that extraordinary a price for oil. The real-terms price was $131 in 2008 and $104 after the start of the Ukraine war.

Still, the rise is already pushing up costs across Europe and Asia. And it is Britain that will be hit hardest of all. Twenty years of deluded policymaking is about to be brutally exposed if oil stays at these levels. Why? Firstly, the UK is critically dependent on imported energy. We have been steadily running down domestic production in the North Sea with a punishing mix of windfall taxes and bans on new exploration, while assuming that wind and solar power would make up the shortfall.

That has not happened and it has cost far more than anyone expected. Instead, we rely on massive imports of natural gas to keep the power stations running and imports of oil to keep the petrol pumps open. As it happens, Britain does not import huge amounts of gas from the Middle East, but we still have to pay the global price. If we had our own production, not only would it increase global supply (and therefore reduce the price, at least marginally), but more importantly, in a crisis, the government could always requisition supplies. As it is, when prices go up, we feel the full brunt of it.

An oil crisis will lay waste to British industry

Secondly, an oil crisis will lay waste to industry. What remains of manufacturing was already getting hammered by industrial energy prices that are twice those of France and four times the US's. Car output has fallen back to levels last seen in the 1950s, as has cement production. Huge swaths of the chemicals industry have closed down. With oil and electricity prices almost doubling, what remains will be in deep trouble.

Many manufacturers that were just about breaking even will now have to close and the damage will quickly spread to retailers, cafes and restaurants if their power prices go up as well. Business was in bad shape already. This will finish many of them off.

Thirdly, we rely on massive amounts of foreign borrowing. The rising oil price has already led to a sharp rise in gilt yields. The government's finances will be in worse shape than ever and that is before ministers panic and launch a bailout to try to control the price rises. Almost a third of the £100 billion-plus the UK has to borrow every year comes from overseas. If there is a general sell-off of government bonds, and that is looking more and more likely all the time, then the UK will inevitably be right in the centre of the storm. Sterling is a big enough currency that it can be traded in volume, but not so big that its central bank can control the market. We can be sure the hedge funds will be shorting gilts and sterling if sentiment turns against the UK.

Stagflation is our best hope

Finally, the government was banking on falling oil prices to have any hope of growth. The only real plan that remained was for the Bank of England to steadily reduce interest rates as inflation came under control, reducing mortgage rates and stimulating demand. Chancellor Rachel Reeves kept boasting interest rates coming down were one of her major achievements. In the wake of the oil-price spike, traders have cut the chances of another cut from the Bank this year to zero. Worse, rates might even have to rise if prices spike upwards. With taxes rising at the same time, and unemployment going up as well, stagflation is the best we can hope for. By the autumn, the UK may have tipped into a full-scale recession.

In short, a government that has already sunk to 20% or less in the polls is going to be in deep trouble. It did not have much of a plan for kick-starting growth or for improving living standards to start with, but what little hopes it may have had for the economy have now been dashed. Its own policies have been making the energy crisis worse, not better. An oil crisis is the last thing Labour needs this year. It will painfully expose all the frailties of the British economy – and right now it looks as if it may be too late to do anything about it.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

Summary

• Chancellor Rachel Reeves delivered her second Spring Statement today (3 March) in the House of Commons
• The annual fiscal event was a largely tame affair, with no major policy announcements made
• The Office for Budget Responsibility (OBR) also published its latest economic forecast alongside Reeves’s statement
• It comes after the government recorded a record-breaking budget surplus of £30.4 billion in January following an uptick in tax receipts

Good afternoon and welcome to MoneyWeek’s Spring Statement live report. Chancellor Rachel Reeves is set to deliver the statement to the House of Commons tomorrow (3 March). We will be covering all the major announcements as they happen, as well as bringing you reaction and analysis.

Will anything major be announced during the Spring Statement?

Rachel Reeves isn’t expected to make any major policy announcements as her preference is to do this just once a year at the Budget.

However, the chancellor did confirm some big changes to the benefits system in the 2025 Spring Statement, although some of these were reversed later in the year.

When is the Spring Statement?

The chancellor will deliver the Spring Statement in the House of Commons at around 12:30pm tomorrow (3 March).

The 2025 Spring Statement lasted around 30 minutes, and this year’s statement is expected to take around the same amount of time.

The Office for Budget Responsibility (OBR), the UK’s fiscal watchdog, will also publish updated economic forecasts alongside the Spring Statement. We expect these to be released at around 2:30pm.

What is the Spring Statement?

The Office for Budget Responsibility (OBR) is required to make two sets of economic forecasts each year which outline their projections for the economy, based on the government’s fiscal policy.

The most significant of these is published alongside the Autumn Budget, the most important fiscal event of the year where most governments outline their economic policy.

The other forecast is usually published in the spring. The chancellor usually makes a statement to the House of Commons addressing these projections, hence the name “Spring Statement”.

The Spring Statement is not necessarily an event where new fiscal policy is announced, but previous chancellors have used the statement to outline new economic plans to meet OBR forecasts.

For example Rachel Reeves used the Spring Statement to announce cuts to welfare in her 2025 statement.

Could ‘boring’ Spring Statement be what’s needed for the pension sector?

Plenty of changes are on the way for the pension sector, such as pensions being included in the scope of inheritance tax from April 2027 and a reduction in salary sacrifice National Insurance savings from 2029.

This comes as the seismic Pension Schemes Bill makes its way through the House of Lords.

With all this considered, pension savers will be hoping for a “boring sequence of fiscal events” this year, including the Spring Statement, said Jamie Jenkins, director of policy at retirement firm Royal London.

“Given the recent history of fiscal events, one can easily get excited at the prospect of boredom,” Jenkins said.

That ends our coverage for today, but make sure you join us again tomorrow when we'll bring you live coverage of the Spring Statement, plus more analysis and expert commentary.

Hello, good morning and welcome back to our live coverage of the Spring Statement, which is taking place at around 12.30pm today. Stay with us as we bring you analysis and commentary on what any announcements mean for you.

Reeves expected to focus on stability amid ‘uncertain’ world

The chancellor’s address to the House of Commons today comes amid major tensions in the Middle East after a joint attack on Iran by Israel and the US.

In response, Iran has launched retaliatory strikes with missiles hitting Israel as well as a host of gulf countries including Kuwait, the United Arab Emirates (UAE) and Bahrain.

In the midst of the conflict, which has caused oil prices to surge, the chancellor is expected to drive home the message that the government’s focus on stability will contribute to a “stronger and more secure economy”.

The chancellor is expected to say: “This government has the right economic plan for our country…in a world that has become yet more uncertain.

“Stability in the public finances, investment in infrastructure and reform to our economy.

“Building growth not on the contribution of a few people or a few parts of the country, but in every part of Britain with a state that doesn’t stand back, but steps up."

What could the impact of the Iran conflict be on the Spring Statement?

It is not clear whether Reeves will directly address the conflict in Iran during her statement today, which could prove inflationary.

That said, many experts are saying the tensions are in too early a stage to know exactly what the future effects will be.

What the conflict could mean for the Spring Statement is that the economic forecasts put forward by the Office for Budget Responsibility (OBR) don't account for the Iran conflict, meaning they are making predictions based on a different world today.

The OBR usually publishes its final forecasts five days before the Spring Statement or Budget, after which the Treasury can fine tune any measures which might affect the economy.

Mortgage lenders cut rates ahead of Spring Statement – should you overpay?

A host of major lenders including Barclays, Nationwide and NatWest have cut mortgage rates ahead of the Spring Statement.

Jinesh Vohra, chief executive officer of mortgage app Sprive, said now could be the time for those on variable rate and cheaper fixed-rate deals to use the extra money to overpay on their mortgage and reduce the amount they’re paying in interest.

Do note, this is based on predictions the Bank of England (BoE) base rate will drop which would feed into mortgage costs, but whether rates will come down in the future is now less certain following the conflict in Iran.

If the conflict causes inflation to rise across the globe, it could make central banks more cautious, including the BoE, and less likely to lower rates.

How is the UK economy doing?

The Spring Statement is an update on the state of the UK economy and public finances, but how are both of these actually faring?

How you judge this depends on what macroeconomic measure you’re looking at, be that inflation, Gross Domestic Product (GDP), unemployment or something else.

The Consumer Price Index (CPI) measure of inflation has slowed from record highs in 2022 and currently sits at 3%, according to the latest data from the Office for National Statistics (ONS). But it is still above the government’s 2% target which the Bank of England (BoE) has to meet.

Meanwhile, the latest figures show GDP grew by just 0.1% in the final three months of 2025, and 1.3% across the whole of 2025, although this was better than the 1.1% GDP growth recorded in 2024.

Unemployment hit a five-year high in January while unemployment among 16 to 24-year-olds rose to 16.1% in the final quarter of 2025, the highest level in a decade.

However, wages continue to grow, with annual growth in weekly earnings between October and December 2025, excluding bonuses, rising by 4.2% and above inflation.

The government also recorded a £30.4 billion budget surplus in January, aided by an increase in tax receipts. The ONS said this was £15.9 billion more than in January 2025 and the highest surplus (when not adjusted for inflation) since monthly records began in 1993.

Spring Statement coming up shortly

We're expecting to hear from the chancellor in around five minutes.

The chancellor has just begun delivering her Spring Statement. We will be reporting on the statement here, as it happens.

Reeves: OBR forecasts show 'our plan is the right one'

The chancellor says the Office for Budget Responsibility’s (OBR) new forecast shows that Labour’s plan for the economy is “the right one.”

She says her fiscal policy has led to inflation and borrowing falling while living standards and economic growth are up.

Reeves reiterated that her ambition is for just one large fiscal event a year, limiting major policy changes to the Autumn Budget.

OBR updates forecasts for UK economic growth

Reeves says the OBR has updated its growth forecasts for the UK economy, stating it will be slower in 2026 than previously predicted then faster than previously predicted in 2027.

It is forecasting GDP to grow by 1.1% in 2026, 1.6% in both 2027 and 2028 and 1.5% in 2029 and 2030. In total GDP will grow by 5.6% over the course of this parliament, Reeves says.

Reeves: Brits to be £1,000 better off a year in real terms by next election

The chancellor says the OBR now anticipates that by the next election, due in 2029, the average Brit will be around £1,000 better off a year. This number, she says, is adjusted for inflation.

She adds: “The economy is growing, living standards are rising, and inflation has fallen. But I'm not satisfied yet with these forecasts."

Unemployment to peak in 2026, but fall thereafter

Unemployment has been a major bugbear for the chancellor in recent months, with UK joblessness rising to a five year high.

However, the chancellor says the OBR’s forecast shows unemployment is set to fall soon.

Reeves says the OBR expects unemployment to peak later this year, but is then set to fall in every year of the forecast period.

Joblessness will then end the forecast period at 4.1%. She adds that this would be lower than it was at the start of this parliament in 2025.

Reeves: Public sector net borrowing to fall to 1.8% by 2030

The OBR’s forecasts say the government is set to reduce public sector net borrowing from 4.3% this year to 3.6% in 2027, then to 2.9% in 2028, 2.5% in 2029 and 1.8% in 2030, Reeves says.

She adds that this year the government is set to borrow less than the G7 average, something she says the former Conservative government “never achieved”.

OBR: Inflation to fall faster than November projection

The chancellor says the OBR’s new forecasts will show that inflation will fall faster in 2026 than it had previously expected.

She takes credit for this, saying her reforms in the Budget are helping disinflation in the UK.

In particular, analysts say the policy of removing green levies from household energy bills is the largest contributor to disinflation. The government says it will save the average household £150 a year from April.

Shadow chancellor: “Is that it?”

Rachel Reeves has finished delivering the Spring Statement.

Conservative shadow chancellor, Mel Stride, opened his response with a sentiment many listeners will have been thinking: “Is that it?”

He lambasted Reeves for having “no clear economic plan”, saying as the economy “bleeds out”, the chancellor comes to the House of Commons with “nothing to say and with no plan”.

Stride further criticised the chancellor for raising taxes and “destroying growth” with her fiscal policy.

OBR publishes economic and fiscal outlook

The OBR has published its economic and fiscal outlook for the UK economy following the chancellor's speech. We'll bring you the main takeaways from the document.

Spring Statement ‘provides little relief to people across the UK’

While Reeves insists the Labour government’s plan “is the right one”, is it enough to convince members of the public? Kevin Mountford, personal finance expert and co-founder at Raisin UK, said: “This provides little relief to people across the UK.

“The economy remains fragile, inflation is still above the Bank of England’s target, people are continuing to contend with cost of living pressures, and we’ve also seen the highest unemployment rate since 2021.”

Some 60% of people dipped into their savings to cover their outgoings last year, including 20% who did so to pay day-to-day bills, according to Raisin’s Great British Savings Report.

“While many lack the buffer to absorb these pressures, approaching the end of the tax year is a critical time to review finances, use available allowances, and make sure savings are earning competitive returns,” Mountford said. “Small steps can make a big difference.”

We look at how much you should have in emergency savings in a separate piece.

OBR: Chancellor’s fiscal headroom now higher than in Budget

Rachel Reeves’s fiscal headroom, the financial buffer the Treasury has against unexpected shocks, is forecast to be higher now than the OBR expected at the Autumn Budget.

Following the Spring Statement, the OBR now expects fiscal headroom to be £23.6 billion by the end of the forecast period (2029/30).

This is £1.9 billion more than was expected in the OBR’s November forecast (£21.7 billion).

If this forecast is correct, headroom of £23.6 billion means Rachel Reeves will have the highest amount of headroom since November 2022.

OBR: ‘Key’ risks to the economy forecast due to Iran conflict

In its economic and fiscal outlook report, the OBR says “key” risks remain to its forecasts following the conflict in Iran.

Conflict in the Middle East could have “significant impacts on the global economy, particularly energy markets”, the document reads.

The report also says the OBR made its forecasts prior to tariffs imposed by US President Donald Trump last week, which has caused ripples in the markets since.

Unemployment expected to peak at 5.3% in 2026

The OBR’s forecast anticipates that UK unemployment will rise to just over 5.3% this year, a third of a percentage point more than expected in its November projection.

The fiscal watchdog says it expects weak labour market demand to continue in the near term.

After peaking in 2026, the OBR believes unemployment will fall gradually to an estimated equilibrium level of 4.1% by 2030.

Impact of inheritance tax reforms revealed

The Office for Budget Responsibility has forecast the impact of impending inheritance tax reforms that will see agricultural and business property relief curbed from April 2026 and pensions included in estate calculations from April 2027.

The OBR said changes to the inheritance tax regime announced since the October 2024 Budget, including taxing inherited pension pots and introducing changes to agricultural and business property reliefs, will account for around 14% of total inheritance tax receipts by the end of the forecast in 2030/31.

It said: "The behavioural responses to these measures and the tax base for inheritable pension wealth are particularly uncertain, adding further uncertainty to the forecast."

Capital Gains Tax to bring in £34.9 billion by end of parliament

The latest OBR forecasts show receipts from Capital Gains Tax (CGT) are expected to rise across the forecast period (until 2030).

The rise comes mainly due to projected rises in equity prices, and changes to the inheritance and capital gains tax regimes largely announced in the Budget in October 2024.

Expected CGT receipts in every year are higher now than they were in the OBR’s November forecast.

The OBR expected £29.8 billion to be raised from CGT in 2030/31 in November. They now expect £34.9 billion.

The November forecasts now show the OBR expects CGT to raise £21.8 billion in 2025/26, £20.8 billion in 2026/27, £25.5 billion in 2028/29, £32 in 2029/30, and £34.9 billion in 2030/31.

OBR: One million extra state pensioners to be paying income tax by 2031

The OBR’s economic and fiscal outlook report states an additional one million pensioners will be drawn into paying income tax by 2031 due to a frozen personal allowance and rising state pension, under the triple lock mechanism.

Reeves has previously said the government won’t tax pensioners whose only income comes from a state pension, but HM Treasury is yet to confirm how this exemption will apply.

OBR: House price growth set to remain steady

The OBR is forecasting house prices to grow by between 2.4% and 2.9% each year between 2026 and 2030, broadly in line with rises in average incomes.

Meanwhile, it predicts interest rates on mortgages to rise from 4.1% in 2026 to 4.5% on average each year from 2027 to 2030.

IFS: Be glad no new policy was announced at Statement

Helen Miller, director of the Institute for Fiscal Studies think tank, said today’s Spring Statement did exactly what it said on the tin, addressing the OBR’s updated economic forecasts and not much more.

She said: “There was blissfully little speculation about potential policy changes in the lead up, and no tweaking tax or spending policies on the day. To her credit, she stayed her hand. One major fiscal event per year is enough.

“The OBR’s forecast for borrowing improved ever so slightly, driven by strong tax receipts, which were more than enough to offset the cost of various policy announcements and reversals since the autumn."

Miller praised the chancellor for not making rash policy decisions in response to the conflict in the Middle East.

She said: “The all-important context is that ongoing events in the Middle East, and the sharp market movements they have induced, have already upended some of the assumptions underpinning this forecast. This is yet another reason to be glad that the Chancellor steered clear of making policy announcements in response."

UK’s economic woes demand bolder and swifter action, says Resolution Foundation

Following the Spring Statement, the Resolution Foundation, a left-leaning think tank, has said the chancellor must be bolder and enact swifter policy after it said the OBR’s forecasts are already out of date.

The think tank claimed the new conflict in the Middle East that emerged on 28 February after the US and Israel struck Iran has meant the OBR’s inflation and interest rates forecasts, which were finalised before the conflict started, are not up to date.

A new continued war between the US and Iran could lead to spikes in the price of energy and a renewed inflationary risk to the UK economy, exacerbating the cost of living crisis.

Analysis by the think tank says, if sustained, the sharp rise in oil and gas prices in the wake of the strikes could add over £500 to the typical household energy bill in the summer and roughly a percentage point to inflation.

As such, the Resolution Foundation said that while there is merit in having a low-key Spring Statement, policy action cannot wait until the Autumn Budget.

Ruth Curtice, chief executive of the Resolution Foundation, said: “The Chancellor may have succeeded in delivering a statement free from news today, but with growth weak, unemployment rising, and the risk of further energy price shocks, the UK’s economic woes demand bolder and swifter action.

Curtice highlighted the prospect of higher unemployment as being “particularly concerning” and urged the chancellor to tackle the problem head on and expand the ‘Jobs Guarantee’ to help get people back into work.

She added: “The best news from today’s Spring Forecast was an outlook for lower inflation and interest rates, but sadly both already look out of date before the ink is dry on the OBR forecast.

“The absence of policy decisions today can’t hide the fact that tough decisions lie ahead. Events in the Middle East have made support for families struggling with the cost of living more urgent. Looking further ahead, the Government still faces the prospect of going into the next election with major tax rises and a fresh squeeze on public services funding.”

UK employment prediction could be ‘too optimistic’

Dan Coatsworth, head of markets at investment platform AJ Bell, said events in the Middle East could mean forecasts on the UK’s rate of unemployment are too positive.

He said higher inflation caused by the conflict, meaning falling interest rates are less likely, could breed negative sentiment among consumers and businesses.

This could mean the OBR’s economic forecasts on growth could be too high.

“That situation might also mean Reeves’ prediction that UK employment is ‘set to peak later this year’ is also too optimistic,” Coatsworth added.

Labour’s economic plan is working, says Starmer

The prime minister showed his support for Rachel Reeves’s Spring Statement, writing on his Substack that we are “at a turning point in our economic plan.”

Starmer declared: “Inflation is down, energy bills and borrowing costs have fallen, productivity and business confidence is rising.

“This has all happened because of decisions, Labour decisions, that we have made. Always with the interests of working people in our minds-eye.”

The PM also reiterated much of what the chancellor said during the statement, saying Labour have “rejected austerity” and are doing all they can to drive down the cost of living.

“I know there is more to do. But our economic plan is working,” he added.

OBR: Welfare spending set to rise to £407 billion by 2031

The OBR’s economic and fiscal outlook report says welfare spending is forecast to rise this year by £18 billion (5.8%) to £333 billion.

It is then forecast to increase, not adjusted for inflation, by an average of £15 billion a year over the next five years, reaching £407 billion in 2031.

Do you think the Labour government's plan for the economy is working? Vote in our poll below.

And that's it, we're going to end our coverage here for today. But keep a close eye on MoneyWeek.com over the coming days as we bring you more analysis from today and what it means for you.

The adage that “elephants don’t gallop” – as the late investor Jim Slater put it – has become accepted wisdom. Yet for many years, large-cap stocks have comfortably outstripped small-cap stocks. The Numis Smaller Companies index (excluding investment trusts) has returned just 36% in the last five years, against 84% for the FTSE 100.

It’s not hard to see why. The FTSE 100 generates more than 75% of its turnover overseas; the figure for the Numis index is closer to 50%, which means it is more dependent on the struggling UK economy.

The British market is increasingly owned by passive funds and overseas investors, who favour larger companies. This applies even with active funds – smaller companies are less liquid, less well researched and more labour intensive than large ones. Finally, the phenomenal growth of US mega-caps has shown that elephants can gallop, while even larger UK companies have improved their performance.

Signs of a turnaround in UK small-cap stocks

Still, January saw a turnaround in small-cap stocks, with strong performance ahead of the large-cap indices, not just in the UK but almost everywhere. Fund managers are optimistic that this will continue.

In the latest results for the value-orientated Aberforth Smaller Companies Trust (LSE: ASL), the managers note that the Numis index now yields more than the market as a whole for the first time since the 2008 financial crisis. At the same time, smaller companies’ dividend cover is higher, their balance sheets are stronger and their dividend growth has been better (63% since 2015, against 29% for larger companies).

“There is good reason to believe that the UK economy may turn out to be better, or at least less bad, than commonly perceived,” they say. “This would be significant for the valuations of small UK quoted companies, especially the more economically sensitive businesses, since so little is expected of them.” They also point to share buybacks and the elevated rate of mergers and acquisitions as key factors.

Aberforth’s own portfolio of 78 companies trades on a multiple of 10.5 times earnings against 13.8 for the Numis index, and yields 4.3% against 3.4%. The £1.5 billion trust has returned 16% over one year and 59% over five, yet its shares trade on an 8% discount to net asset value (NAV).

Performance picks up

The star of the sub-sector has long been the £220 million Rockwood Strategic (LSE: RKW), with a five-year return of 150%. This is an “active-value” trust, seeking to buy significant stakes in severely under-valued – and perhaps undermanaged companies – to catalyse improvement. It is highly focused, with the top ten holdings accounting for two-thirds of the portfolio.

The £150 million Strategic Equity Capital (LSE: SEC) has a similar strategy. It has out-performed Rockwood over the past year, with a return of 25%, although is far behind over five.

Rockwood’s £250 million sibling Odyssean (LSE: OIT) is picking up after a dull patch, with a one-year return of 17%.

Small-cap recoveries are usually led by the FTSE 250 mid-cap index, with recovery then filtering down to small and micro caps. So it is no surprise that the £250 million Schroder UK Mid Cap Trust (LSE: SCP) has also performed well, up 18% in the last year. Even the more growth orientated trusts from BlackRock, Henderson and JPMorgan – including the £1.8 billion Mercantile (LSE: MRC), the largest in the sector – have produced double-digit returns over the past year.

Of course, this recovery could prove to be just a flash in the pan, with the out-performance of larger companies soon resuming. However, valuations are low, pessimism is widespread and there is a common view that small companies can no longer be expected to gallop faster. In this climate, the risk of regret from missing out on a multiyear bull market in small caps outweighs the risk of being in it.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

How bad are the youth unemployment figures?

Youth unemployment figures make grim reading. Government data released earlier this month shows that the UK unemployment rate rose to 5.2% in January – the highest rate for five years.

But in the last quarter of 2025, the unemployment rate for 16-to 24-year-olds rose to 16.1%.

That’s higher than the Covid peak of 15.3% in late 2020 and the highest level for more than a decade. And for the youngest workers –16-and 17-year-olds who have left education – the rate is a shocking 34.2%.

Whatever measure you look at, there’s clear evidence that younger workers are bearing the brunt of the UK’s increasingly soft jobs market.

For example, the number of payrolled employees in the UK fell by 134,000 in the year to January. But for younger employees (on this metric meaning younger than 34), the decrease was 174,000; for older workers there was a net increase.

How does this compare globally?

It’s bad. For the whole of this century, it’s been easier for young workers to find employment in the UK than in mainland Europe, hence the millions of young Europeans who made Britain their home.

But now, for the first time that situation has reversed. According to the OECD think tank, the UK’s youth unemployment rate now stands at 15.3% – higher than the EU’s level of 15% and more than twice that of Germany.

Yet for workers overall, the jobless rate remains higher in the EU than here, at more than 6%. It’s only for younger workers that Britons are worse off.

What’s gone wrong?

A mix of macro-economic factors, made worse by recent policy decisions by the Labour government.

Youth unemployment has been a persistent and cyclical part of the UK labour market over many decades.

Structural shifts in the post-war period, deindustrialisation in the 1980s and the global financial crisis – all saw youth unemployment rise, and it has consistently been higher than overall employment.

Recent years have seen a long period of low or no growth and lacklustre productivity, combined with an inflationary spike and cost pressures on businesses.

All of that tends to reduce hiring and young workers are often the first affected.

However, there’s no doubt that Labour has made things worse. And that’s not merely the judgement of Labour’s opponents: it’s the publicly expressed view of Huw Pill, the Bank of England’s chief economist.

What does the Bank of England’s chief economist say?

Huw Pill told a parliamentary committee this week that last year’s increase in employers’ national-insurance contributions, plus the drive to level up the youth rates of the minimum wage towards the main adult rate, “have had a particular effect on young people” aged between 16 and 21.

This cohort of young people were already launching their careers at a difficult time in the aftermath of the pandemic, he says, and in the face of deeper structural changes such as the adoption of AI that policymakers might find “difficult to manage”.

What about the minimum wage?

The minimum wage has surged by 75% – in real terms, not merely nominal – since it was introduced by New Labour in 1999.

Initially, the rates were £3.60 per hour for the over-22s and £3 per hour for 18-to 21-year-olds.

With inflation, those rates today would be £7 and £5.80. In fact, the minimum wage is now £12.21 per hour for the over-21s (rising to £12.71 in April); £10 per hour for 18-to 20-year-olds (rising to £10.85); and £7.55 for 16-to 17-year-olds (rising to £8).

The policy was widely accepted as a success and adopted by the Conservatives, who had opposed it at the time as a jobs-destroyer.

And indeed, since its introduction there has been little sign that it was hurting employment; in 2022 the headline joblessness rate hit its lowest since the 1970s, at 3.6%.

So what happened?

The Conservatives became so confident about the policy that in government they set a goal of raising the main minimum wage (rechristened the “living wage”) to two-thirds of median earnings, making it one of the highest relative to earnings in Europe.

They also phased out lower rates for workers aged 23-24 in 2021 and for 21-to 22-year-olds in 2024.

Yet it’s now clear that the inexorable rise of the minimum wage has reached a tipping point, with businesses loudly telling policymakers that it is stopping them from hiring young workers.

Nor is it solely minimum-wage workers who are struggling: it’s graduates, too.

The soft economy, combined with the promise of AI’s workplace abilities, has led to a graduate “jobpocalypse” in which companies have slashed or paused recruitment programmes, entry-level jobs are disappearing and graduate-level unemployment is at an all-time high.

Why is this issue so important?

Because people’s early interactions with the labour market play a critical role in shaping their long-term futures.

Researchers have consistently found that NEETs – people not in education, employment or training – are “at risk of life-long socio-economic scarring, remaining at significantly elevated risk for worklessness and health problems for decades”, says John Burn-Murdoch in the Financial Times.

In the UK, this group of young people who are increasingly disengaged from not only the economy, but also the rest of society, has doubled in just over a decade from 4.5%-9% of those aged 20-24.

Alan Milburn, the Blair-era cabinet minister, is now conducting an inquiry into the issue.

“We’re seeing something dramatic changing in the labour markets,” says Milburn.

Some 45% of 24-year-olds who are not in education, employment or training have never had a job.

"If you haven’t had a job by 24, that entails a long-term scarring effect and you’re probably then stuck in a lifetime on benefits.”

Britain is “facing the existential risk of a lost generation” – with all the economic and fiscal damage, and social and political turbulence, that will entail.

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Orbex was certainly ambitious. It was one of two companies backed by the British government with plans to develop a domestic space industry.

At its peak in 2022, the business was valued at $220 million. It planned to create a commercial rocket that would be launched from its base in Scotland.

If it could have made it work, and brought it to completion on budget, it could potentially have been one of the leaders of the European space industry.

But last week the government decided not to take part in the latest funding round, despite putting in £26 million in two earlier rounds, and the company had no choice but to call in the administrators.

It is not the first space project backed by the British government to fail. An earlier investment in OneWeb, a satellite start-up to rival Starlink, was made under Boris Johnson’s government.

But that also came to nothing and it had to be merged into France’s Eutelsat. It is not an inspiring record. The government keeps pumping money into research and development, only to watch its investments fail.

The space industry is throwing up some serous opportunities

Yet space is turning into one of the most important industries of the 21st century. The global space industry is already worth an estimated £500 billion a year and it is growing all the time. Elon Musk’s SpaceX is expected to list its shares later this year with a value of $1 trillion or more.

Rivals such as Amazon founder Jeff Bezos’s Blue Origin are growing just as quickly.

From internet connections, to orbital data centres, to mining for raw materials, lots of commercial applications are opening up. It has become clear that space is a serious commercial opportunity, and one where lots of money will be made.

Britain should want to be a part of that. The UK economy is hardly in great shape, but if it is to start growing again then it needs to find a way of building new, high-tech industries that generate plenty of wealth and well-paid, high-skill jobs.

Space is a perfect candidate, especially considering we have a deep heritage in aerospace and engineering, and that we also have the venture-capital firms to back them once they become established. There should be plenty of British entrepreneurs building new companies in the sector.

Yet we have taken completely the wrong approach. We are relying on the traditional policy of state-led investment, even though it has failed countless times in the past.

The government tries to identify a company with a promising technology and gives it a little bit of money, then everyone crosses their fingers and hopes it turns into a success, or at least manages to find a buyer with deeper pockets. More often than not, it doesn’t work. The “winner” turns out not to be very good after all, the technology doesn’t quite work as planned, the schedule slips and the government loses interest. The start-up closes or is sold off. Rinse and repeat.

Britain should do something different. We should radically deregulate to allow innovation. Of course, the industry needs proper safety standards. Nobody wants to see rockets blowing up on the launch pad, especially if it risks lives.

But there is still plenty we could be doing to make the UK the most competitive country in the world to start and build a space company.

Put a rocket under Britain's space industry

To start with, we could make space profits free of corporation tax. If Britain had a zero rate for operations off-planet, that would be very attractive for firms around the world. Next, offer a 10% capital gains tax rate if a space business is listed or sold.

Again, that would make the UK the world’s best place to invest in new space businesses.

Finally, relax the technical regulations. The industry is inherently risky. SpaceX has suffered an explosion, but that has not stopped it from growing. If there are no humans on board, it does not really matter if a spacecraft does not work quite as planned.

We should recognise that we can’t apply the same standards we would to a car or a toaster, and relax the rules accordingly.

It is the one sector where it will pay to be a little less cautious. Let entrepreneurs experiment with what works and what doesn’t. That’s the way the UK could become a world leader in the space industry.

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UK inflation fell in the year to January 2026, according to data released this morning (18 February) by the Office for National Statistics (ONS), following an uptick in December 2025.

The headline rate of Consumer Prices Index (CPI) inflation rose by 3.0% in the 12 months to January, down from 3.4% in the month-before period. This was slightly above predictions from Bank of England staff, which had forecast a CPI increase of 2.9%.

While it rose in December, the UK’s inflation rate is trending downwards over time. January’s 3.0% figure marks the slowest annual rate of CPI inflation since March 2025.

While it expects CPI to grow at around 3% during the first quarter of 2026, Bank of England forecasts currently predict that inflation will fall to 2.1% in April, largely thanks to disinflationary measures included in last year’s Autumn Budget.

The drop in UK inflation in January is expected to support an interest rates cut at the next meeting of the Bank of England’s Monetary Policy Committee (MPC).

“Granted services inflation was a tad stronger than expected, and this does play an important role in the Bank’s thinking,” said Luke Bartholomew, deputy chief economist at asset manager Aberdeen. “But with the labour market data yesterday pointing to ongoing weakness in employment and a further softening in pay growth, most policymakers are likely to look through any short run stickiness in the services data.”

On a monthly basis, CPI fell by 0.5% between December and January.

What pushed UK inflation lower in January?

The biggest disinflationary effects in the year to January came from transport, food and non-alcoholic beverages, and housing and household services.

“Inflation fell markedly in January to its lowest annual rate since March last year, driven partly by a decrease in petrol prices,” said Grant Fitzner, chief economist at ONS.

“Airfares were another downward driver this month with prices dropping back following the increase in December,” Fitzner continued, adding that lower food prices also supported the slowdown in UK inflation over the period.

On the other side of the ledger, health costs and restaurants and hotels were the biggest upward drivers of UK price increases over the period, both contributing 0.03 percentage points to CPI inflation.

What is inflation?

Inflation is an economic metric that measures the rate at which prices are rising within an economy. It is one of the key metrics observed by policymakers, including politicians and, crucially, central bank interest rate-setters, in order to make decisions relating to the economy.

There are various ways of measuring inflation, but the key one is CPI. This is the inflation metric that most economists and policymakers regard as the headline measure of inflation in the UK and worldwide.

Most economists view 2% as the optimal CPI rate for a healthy economy. It implies that prices are rising (which indicates economic growth), but slowly enough not to become unmanageable for business and household budgets.

How does UK inflation impact your money?

Inflation impacts your money both directly and indirectly.

Directly, the rate of inflation reflects the pace at which the price you pay for goods and services increases. Assuming your income doesn’t change, higher rates of inflation will mean you have less purchasing power; your monthly budget may not stretch as far or you may not have as much disposable income left once you’ve paid for your essentials.

Indirectly, it impacts various aspects of the economy that are in turn reflected in your finances. This could include increases in the bills you pay (many utilities, for example, increase annually in line with retail prices index (RPI) inflation) or pay rises from your employer, but most importantly, inflation feeds into interest rates.

Central banks, such as the Bank of England, raise or lower interest rates in order to balance controlled inflation against healthy economic growth. When inflation is running high or expected to rise, policymakers (specifically the MPC) raise interest rates in order to discourage inflation. When economic growth is weak, they lower them in order to stimulate growth.

Interest rates in turn feed into various key components of your personal finances. For example, higher rates mean you’ll likely pay more interest on your mortgage. But at the same time, they also mean you should earn more interest on your savings or cash ISA.

So a drop in UK inflation now could have implications for your finances next time the MPC meets to set interest rates.

It is nearly ten long years since the British people voted for Brexit and to leave the European Union. The latest opinion polls show that a majority now believe that Brexit has gone badly. Too much time has been wasted searching for a satisfactory halfway house that does not exist. The additional uncertainty has delayed business investment and dampened economic growth. The increase in friction at the border has hampered the UK’s trade with the EU, at least in some goods. The politics has also remained toxic. In particular, net migration to Britain has surged, rather than being brought under control. The carving out of Northern Ireland has undermined the integrity of the UK.

On the other hand, even this “botched Brexit” has not been the economic disaster that many predicted. The UK still leads the rest of Europe as a destination for foreign investment. Domestic investment is rebounding as uncertainty fades. There has already been some good progress in lowering barriers to trade with the rest of the world. Meanwhile, trade in services has boomed. The City of London continues to flourish and is now a champion of the benefits of smarter regulation. Susan Langley, the new lady mayor, has said that the prospect of realigning financial rules with the EU has passed and warned against linking regulations to any single jurisdiction.

On the money front, Britain has already saved tens of billions of pounds in contributions to the EU budget. Some argue that this has been more than offset by the loss of tax revenue as a result of weaker economic growth. However, it is still hard to separate the impact of Brexit from other shocks, notably the UK’s relatively high energy costs. Overall, the performance of the UK economy has been similar to that of France, and much better than Germany’s. The really big divergence has been between Europe’s persistent economic weakness and America’s strength.

Finally, just to chuck another uncertainty into the mix, many argue that the creeping isolationism of the US under Donald Trump has strengthened the case for Britain to realign more closely with the EU.

Is Brexit being reversed by Keir Starmer?

This is the complicated backdrop against which many of the old debates about Brexit are now resurfacing. Thus far, Keir Starmer’s Labour government has attempted to steer a middle course, with some success. Under Starmer, Labour has stuck to the “red lines” in the party’s 2024 manifesto. This explicitly ruled out a return to the EU’s single market or to the customs union and said no to the restoration of “freedom of movement”. In the meantime, the Labour government has developed the new global trade deals started under the Conservatives and continued the gradual decoupling from EU rules in areas such as financial services and animal welfare (both for the better). Until recently, the long-scheduled “UK-EU reset” also looked like something that most people could happily support. The government was simply proposing to tidy up parts of the post-Brexit arrangements that could easily be improved. Examples here included the mutual recognition of veterinary standards and professional qualifications, and making life a little easier for touring artists.

This strategy has had some real benefits. Brexit has dropped way down the list of concerns for the public and, at least as importantly, for businesses. The Bank of England’s “Brexit Uncertainty index” had already fallen sharply since 2019, but it has remained low under Labour. Yet, this “middle way” now appears to be unsustainable. Labour had framed its position as accepting Brexit as a settled fact. But 2026 could be the year when this starts to change.

This partly reflects internal Labour party politics. The days of Starmer’s premiership appear to be numbered. Potential leadership rivals, notably Wes Streeting and David Lammy, have already broken ranks by backing a new UK-EU “customs union”, at least implicitly. This followed YouGov polling that suggests that 80% of Labour voters would also be in favour. Prominent figures in the trade-union movement and in the media are banging the drum for the customs union, too.

This echoes a wider debate. Could renewed and closer ties with the EU help to address Britain’s economic problems? Some say that forming a new customs union would be a good first step. Others argue that we could also improve our access to the single market by accepting more EU rules. But scratch just a little deeper and it becomes clearer that the choices are not that simple.

In a nutshell, a “customs union” is an agreement to remove tariffs on most, or all, goods traded between member countries. To make this work, all members must apply a common external tariff to goods imported from outside the union. It is not possible for a non-EU nation state, such as the UK, to join the EU’s Customs Union (capital “C”, capital “U”). But it would be possible to enter some more limited form of “customs union” with the EU, as Turkey has done, and as then prime minister Theresa May initially proposed as part of her Withdrawal Agreement.

Would a customs union with the EU work?

However, there are three compelling reasons to oppose this idea. First, there would not be much to gain in terms of lower tariffs. Most UK-EU goods trade is already tariff-free and quota-free under the terms of the existing deal (the EU–UK Trade and Cooperation Agreement). Admittedly, EU tariffs are still charged on some imports from the UK where the appropriate “rules of origin” are not met, including some high-tech manufactures, or where it is too costly to prove compliance with them, such as some low-value goods. But any remaining tariff benefit from a new customs union would still need to be set against the UK’s obligation to apply the EU’s tariffs on goods that we import from the rest of the world. These EU tariffs are often higher. The UK would probably also be obliged to share customs revenues with the EU, and to allow countries that the EU has trade deals with to access UK markets with no guarantee of reciprocity.

Second, there is not much to gain in terms of non-tariff barriers either. Crucially, there would still need to be checks at the UK-EU border, especially if the UK remained outside the single market and the Schengen free-movement zone. These checks could only be reduced by accepting a raft of other European regulations – with no say on how these are determined.

Third, the ability to do independent trade deals with other countries would be severely limited. The UK might still be able to negotiate a few agreements covering some aspects of trade in services, but not trade in goods. At the very least, the government would have to renegotiate all the new trade deals it has done since Brexit – as Starmer has rightly stressed. The UK may have to cancel most of these new deals altogether, making the UK look like a very unreliable partner. For instance, UK goods exporters currently face lower US tariffs, on average, than those from our competitors in the EU selling the same products. This advantage is partly due to Brexit – and it would be lost.

Any support for rejoining a “customs union” would surely fall away if these costs were properly explained. Indeed, other polling by YouGov last summer found that only 9% of Labour voters would be happy for the UK’s tariff policy to be decided by anyone other than the UK government itself.

Single market would bring few benefits

There have also been many dodgy claims about the economic benefits. In particular, the Liberal Democrats have argued that a new customs union with the EU could boost the UK economy by 2.2% and tax revenues by £25billion. These figures are attributed to a February 2025 study by the consultancy Frontier Economics. In reality, this study relied on some heroic assumptions about the impact of small changes in trade openness on productivity.

Moreover, the report modelled something that is simply not on the table, namely regulatory alignment based on “mutual recognition”, with the most favourable results assuming that this applies to both goods and services. So this was not, in fact, the same thing as a “customs union”.

Some supporters of a new UK-EU customs union also still claim that the EU would be willing to offer relatively favourable terms. But this is a triumph of hope over experience. The recent negotiations over a limited UK-EU reset have stalled in several areas precisely because the EU wants to extract every possible concession. For example, the UK is being asked to overpay to rejoin the EU’s Erasmus student exchange programme and even for the right to contribute to Europe’s defence. Adopting the EU carbon-emissions scheme and imposing additional carbon taxes will raise energy costs even further.

There is also little evidence that realigning with the single market would provide much of an economic boost. EU policymakers are experts in “managed decline” and masters of overregulation.

It might be argued that the EU is a worse place without the UK to support other more instinctively market-liberal countries. But the counter-argument is that it would be madness to seek to realign more closely with a failing economic bloc. The euro debt crisis and now the need to ramp up spending on defence have put modernisation of the EU on hold.

The UK could do more good by demonstrating the economic advantages of supply-side reform and smarter regulation outside the EU. If other European countries then want to follow, all the better. Indeed, Europe’s biggest banks and insurers have already called for EU regulators to copy the example of the UK with a formal objective to support economic growth and competitiveness, intensifying the sector’s drive to ease the cost and complexity of its rules.

A more positive vision of Brexit

This would support a more positive vision of Brexit, based on going back to basics. The vote to leave the EU in 2016 was essentially a vote to regain control of borders, laws and money. Polling shows that the British people still want their own government to make policy in a wide range of areas, not just trade. This is surely incompatible with giving sovereignty back to the EU. Viewed this way, the UK must be able to diverge from European regulations, especially in growth sectors such as AI and life sciences. The UK also needs to be able to run its own trade policy and choose who comes to live, work or study here.

This more positive vision of Brexit may seem hard to square with the academic studies that suggest that the departure from the EU has had a large and negative impact on trade, productivity and growth. But just like the headlines from opinion polling, it is worth digging a little deeper. This can be illustrated by dissecting two numbers – 4% and 8% – which are widely quoted by those arguing that the UK should rejoin the EU, or at least the single market and customs union.

The 4% is the assumption made by the Office for Budget Responsibility (OBR) about the long-term impact of Brexit on UK productivity. Clearly, any analysis from the government’s own fiscal watchdog needs to be taken seriously, but this figure is widely misunderstood. For a start, the 4% is simply an average of the results of 13 external studies, rather than original work by the OBR. These studies, all done before the final shape of the exit agreement was known, used a variety of different models and assumptions, most of which now look far too pessimistic. Even then, nine of these studies put the impact at less than 4%.

Moreover, the key driver of the 4% hit to productivity is assumed to be a sharp fall in the “trade intensity” of the UK economy. Specifically, UK imports and exports are both assumed to be 15% lower than if we had remained in the EU. This covers total trade, both goods and services, and with the whole world, not just the EU. These assumptions are only weakly supported by the actual data – if at all. Falls of 15% had always looked pessimistic given the relatively favourable tariff terms in the initial UK-EU trade deal. In reality, the overall “trade intensity” of UK GDP has continued to track that of our peers in the EU, rather than collapse.

Most economists agree that UK trade has held up much better than expected after Brexit. The UK’s trade intensity might be a few percentage points lower than it would otherwise have been. This is unlikely to make much difference to productivity in a large, advanced economy that remains relatively open. Moreover, any drag is likely to fade over time as businesses adjust, the full benefits of new post-Brexit trade deals start to come through, and the major EU economies continue to underperform against the rest of the world.

Last but not least, the OBR’s 4% does not take account of any potential benefits of Brexit, including new trade deals, smarter policies on immigration and better regulations at home. This omission is partly because the OBR judges that these benefits will be small. But it is mainly because it does not usually incorporate the impacts of policy changes that have not yet been made.

Applying the smell test

But one of the most extreme estimates of the “harm done by Brexit” comes from a Working Paper published in November last year by the US National Bureau of Economic Research (NBER). This study estimated that Brexit has already shrunk the UK economy by as much as 8% since the vote to leave in 2016, which would indeed be nothing short of a disaster.

However, the 8% figure fails a simple “smell test”. For context, the UK economy has grown by about 12% since 2016, outpacing Japan, Germany, Italy and France. If you add another 8% the UK would have been the fastest growing economy in the G7 – bar only the US – and left its EU peers far behind. This would not be impossible, but it is surely unlikely.

So, how did the authors of the NBER paper arrive at an 8% hit? They compared the UK’s per capita GDP growth since 2016 to that of a wide range of other countries and assumed that any underperformance must have been due to Brexit. There are a number of problems here. But briefly, any GDP-weighted comparison is dominated by the US. Over this period the US economy has benefited disproportionately from low energy prices, a large fiscal stimulus and the boom in artificial intelligence.

The NBER paper also uses a computer program to find the weighted group of countries (or “doppelgänger”) whose performance was closest to that of the UK before Brexit. This control group can be a very odd bunch. The NBER doppelgänger gave the highest weight (61.4%) to the US, followed by Estonia (10.9%) and Greece (9.5%). Latvia, Iceland and Hungary also featured. There was no place for Germany or France, which are more obvious benchmarks. More fundamentally, the best fit in one period and in one set of circumstances may not be the best in another, especially where there have been many other shocks (not just Brexit) which could be expected to hit the UK differently, including Covid and the energy crisis.

Finally, Canada is the laggard among the G7 group of major advanced economies in terms of growth in per-capita GDP, not “Brexit Britain”. That perhaps has something to do with Canada’s very high levels of net immigration – a feature shared with the UK. But clearly it cannot be blamed on changes in trade relations with the EU.

Which way should Britain jump?

In summary, the mainstream narrative on Brexit’s economic impact relies on many dodgy assumptions and selective use of data. While it is important to acknowledge the negative effects, it is equally important to question the magnitude and duration of these effects, and to consider alternative explanations.

Looking forward, the UK needs to decide which way to jump. Many will continue to argue that Britain’s economy can only thrive again if properly unbound from the EU. However, it is increasingly easy to imagine Labour heading into the next election with an explicit commitment to realign much more closely, even if this stops short of full membership. That would at least be a more honest position than the current fudge. But reopening the “Brexit wars” could increase uncertainty again and do more harm than good, especially as many in the EU seem as determined as ever to punish the UK for daring to leave.

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Andrew Van Sickle: A recurrent theme this year, and the subject of one of your key research papers, was drawing parallels between the dotcom bubble and this AI boom. What’s your take? Is this a case of rational exuberance?

Rob Arnott: It is a case of rational exuberance, with somewhat irrational pricing. To be clear, AI is the real deal. There is no ambiguity about that. It will change our world in more ways than we can imagine.

It was the same story in 2000. The internet was going to change everything: how we buy and sell goods and services; how we communicate with family and friends – or clients; how we get our news; how we do our research. And all of that happened. It’s just that the internet wasn’t embraced as rapidly as its cheerleaders expected, and I think the same will be true with AI.

A vital issue the narrative in 2000 missed was that the biggest stocks at that stage weren’t necessarily going to be the leaders in 2010, let alone 2020. I recall Cisco Systems’s chairman in 2000, John Chambers, saying he didn’t see why Cisco couldn’t grow sales by an annual 40% for years to come. At that pace you grow sixfold in five years. In fact, it grew sixfold in 25 years. Still impressive, but not 40%. As a result, investors holding Cisco since March 2000 are slightly in the red.

Of the top-ten companies by market capitalisation in 2000, only Microsoft remains on the list today. The other nine have all been displaced. Intel and Nokia were on the list, for instance. Other firms became better at producing chips and phones. People talk about companies having moats (competitive advantages that stop rivals from encroaching on their territory), but moats don’t last forever.

AI is already displacing current market leaders

There has already been some of this sort of displacement with AI. Google’s core business model is making money from sponsored links and pop-up advertisements. People discovered that ChatGPT or Perplexity can be used as a search engine, and you don’t get annoying pop-ups and sponsored websites; no need to scroll through a dozen sponsored websites to get to something useful. Moreover, OpenAI itself was disrupted a year ago by DeepSeek.

So this is a rational bubble in that AI is very real. All the market leaders have a shot at being dominant players for years. But I also recognise that some of them will be displaced.

Andrew Van Sickle: Could you give an example from your experience that makes you think AI is the real deal, as you say?

Rob Arnott: The latest iteration of ChatGPT is extremely impressive. When we write a research paper, we hand it over to AI and ask it to write a summary and critique it. We also get it to tell us if we’ve missed any references or citations that we ought to have considered.

We ran a paper we recently finished through ChatGPT and got an elegant synopsis that was better than anything the authors could have come up with. We also got a thorough evaluation of what was good about the paper and what wasn’t so good, along with a list of citations we’d missed. Four of them made us think: “Oh, my goodness, we should have thought of that one.” Four were borderline, and two didn’t exist.

The upshot is that AI can’t think like a person, but it’s excellent at scouring data and comparing it with information it has already absorbed. It can sift data sets of billions and billions of data points and then it will start to appear close to being human. If there are fewer data points, though, it will struggle badly.

For example, when it comes to researching long-term stock market behaviour there are only thousands or millions of data points, depending what we’re looking at, so AI can’t come close to the efficacy of human judgement supplemented by ordinary statistical tools. It can’t predict things like whether there will be a market downturn or recession. In short, AI is a quantity, not a quality game.

Andrew Van Sickle: Given the recent emphasis on technology growth stocks, where do you, as a value guru, see bargains?

Rob Arnott: The spread between growth and value is wide everywhere; globally speaking, it is near record territory. In the US, it is close to the level seen at the peak of the dotcom boom and the summer of 2020.

I would say don’t abandon growth, but don’t overweight it. Betting against a bubble is dangerous because bubbles can last longer and go further than you can imagine. So to the extent you have value in your portfolio, put more money into that.

We at Research Affiliates are always keen to find value and reduce concentration risk. We came up with the Research Affiliates Fundamental index (RAFI) series in 2005. These indexes are skewed towards value. The companies are weighted by their size and hence their economic importance – using measures such as sales, cash flow, book value and dividends – rather than share price. This approach has done much better than market-capitalisation-weighted value indexes, proving superior in three out of four years.

So investors might like to research the RAFI-based exchange-traded funds (ETFs) from Invesco that focus on value. There is the FTSE RAFI All World 3000 Ucits ETF (LSE: PSRW) for a global play; the FTSE RAFI US 1000 Ucits ETF (LSE: PRUS) for US value; and its European counterpart the FTSE RAFI Europe Ucits ETF (LSE: PSRE). The FTSE RAFI UK 100 Ucits ETF (LSE: PSRU) is a British version.

Andrew Van Sickle: Let’s move on to gold. It appears to be pausing for breath. Is the medium-term outlook still bullish, do you think?

Rob Arnott: The biggest factor that’s bullish for gold is the developed world’s addiction to debt-financed government spending. The fear is that fiat currencies will create their own financial crisis that could be bigger than the global financial crisis of 2009; I think that’s reasonably likely.

I don’t see it as an imminent threat. But just as Greece had to face the music at some point when its debt started to soar towards 200% of GDP, the US isn’t immune to that dynamic. We may be the biggest economy in the world, but that doesn’t mean we can endlessly spend money we don’t have. A crisis could arrive in ten to 15 years’ time.

It would require a severe bout of inflation to reduce the real value of the debt, and the consequence would be that the gold bugs of today would not regret their purchases even at today’s prices. That said, I am not a gold bull for 2026, given the recent surge to new records and the froth in the market.

Andrew Van Sickle: What could the result be of Donald Trump’s apparent desire to influence the level of interest rates set by the US Federal Reserve?

Rob Arnott: The upshot may be that he will keep rates 1% or 2% below where they ought to be, resulting in free money, which I define as rates below inflation: negative real rates. We had a dozen years of free money in the US, which was a key reason for slow growth.

The trouble is that stimulus doesn’t stimulate. My colleague Chris Brightman has written a great deal on stimulus failing to generate sustainable, healthy growth; you can find some of the papers on our website. Monetary stimulus leads to asset bubbles, exacerbating wealth inequality. It pushes money into the hands of people who are already well off, and they spend it, boosting corporate profits and stimulating the stock market further.

Part of the overall stimulus in recent years has been fiscal, too. That involves the government either taxing or borrowing money out of the private sector and then spending it, so it can hardly stimulate private enterprise.

Andrew Van Sickle: What is the outlook for US inflation? Will the tariffs boost it?

Rob Arnott: What could make inflation jump again is massive overspending, which we’re still doing, so that is a dangerous game. I wouldn’t view tariffs as particularly inflationary, however. I remember many analysts panicking early last year about a deep recession and hyperinflation.

But think it through. If the tariff rate settles at an average of 15%, it’s no different from a 15% VAT levy – applied in a limited way, solely to imports. That’s hardly catastrophically inflationary. It’s a tax. It boosts costs on taxed items. But if our imports in the US are worth 11% of GDP, and if we have an average tax of 15%, then it’s going to raise 1.6% of GDP in tax revenues. And that’s exactly what happened.

So who pays it? The suppliers swallow part of it to remain competitive in the US market; the supply chain takes some of the strain. The consumer has to pay the rest, perhaps half, or 0.8% of GDP – as a one-off. As a libertarian, I think the correct tariff rate is 0%. But the tariffs aren’t going to send inflation rocketing.

Trump’s tariffs games are essentially him implementing a strategy from Sun Tzu’s The Art of War: scare your adversaries and you can win without firing a shot. So, he threatens 100% tariffs and opts for far less. He’s lived by that book for his entire life.

Andrew Van Sickle: Last time we talked, you said you thought China had taken a statist turn under Xi Jinping. He has recently said he wants to make bolstering the private sector more of a priority. Has the regime realised that it will need to be more free-market to get China out of this debt deflation?

Rob Arnott: The trouble is that Xi Jinping is an unreconstructed Maoist, and so paying lip service to the private sector is about as far as he is likely to go. I still think China will get old before it gets rich.

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The blunders, mishaps and poor performance of the current government have led to nostalgia for the golden years of New Labour under Tony Blair. In reality, Blair’s government made decisions that have proved extremely damaging in the long term, sowing the seeds of Britain’s subsequent poor performance and many of its current problems. Here are my top ten.

1. Selling 40% of Britain’s gold reserves

The policy was announced in May 1999 with the gold price at $282 an ounce and completed in March 2002. The average price achieved was $275, compared with a current price of $4,800. The opportunity cost of the 12.7 million ounces sold was $57.5billion.

2. Windfall tax

Labour’s first Budget included a £5billion “windfall” tax on the businesses privatised under the Conservative government, a programme that the Labour Party had consistently opposed despite the appalling record of these businesses in the public sector.

This tax on the businesses, rather than on the investors who had profited from underpriced flotations – combined with the castigation of the bosses of the privatised businesses and regulation intended to favour lower prices at the expense of investment – drove most of the utilities into the hands of unaccountable, often overseas, private equity.

3. Tax raid on pension funds

Labour's first budget raised £5billion a year by abolishing advance corporation tax (ACT). Until then, UK-listed companies had deducted the standard rate of income tax from gross dividends and paid the resulting amount to the Inland Revenue as ACT. The ACT paid was credited against the company’s mainstream corporation tax and investors (such as pension funds) that were not liable for income tax could claim the tax back.

Abolition discouraged pension funds from investing in UK equities, severely undermined final-salary schemes in the private sector and significantly increased pension costs to businesses. The result was the relentless decline in the London Stock Exchange as a source of capital for British businesses.

4. Bankrupting British Energy

The government made a concerted effort to close down nuclear-power generation in the UK, largely because of the industry’s role in undermining the effectiveness of the coal miners’ strike in 1984.

Nuclear-power generation was struggling to compete with gas-fired generation due to a glut of gas and the government made this worse by piling other financial obligations on British Energy. It was forced to sell assets at knockdown prices in the UK and Canada and a lucrative fuel-reprocessing business was shut down.

The destruction of industrial expertise, the crippling of a viable domestic nuclear generator and the heaping of excessive “safety” requirements on the remaining plants has made it eye-wateringly expensive to build new nuclear plants at Hinkley Point and Sizewell.

5. Railtrack

Labour had hated rail privatisation and used the excuse of a rail crash at Hatfield in 2000 to take control of Railtrack, which owned the infrastructure. As a nationalised industry, its safety record had been poor, not least because British Rail had a policy of replacing only 1% of its track each year, a strategy embedded into Railtrack’s financial model at privatisation.

When privatisation brought a reversal in the long decline of rail usage, the problem of underinvestment became critical. Renationalisation brought a massive increase in the cost of investment projects, chaotic management and relentless political involvement – but for which HS2 would have been completed long ago at a far lower cost.

6. Abolishing GP fundholding

Reforms in the 1990s turned the NHS upside down, enabling general practitioners (GPs) to decide which hospitals their patients were sent to for treatment. This was resented by hospital doctors and consultants, who looked down on GPs, and also by the Labour Party, which preferred a centralised, top-down structure.

The system wasn’t perfect, but it cut waiting times, improved patient care and facilitated significant gains in productivity. Labour abolished the system and put centralised commissioning agencies in charge, rather than the GPs who knew their patients and where to send them. For the subsequent 25 years, NHS productivity stagnated at best.

7. Throwing money at the NHS

Blair’s government thought that the only problem with the NHS was that it was underfunded. So it significantly increased the organisation’s funding without any attempt to get value for money. Now, little more than half the 1.4 million full-time equivalents employed by the NHS are clinical.

At least the extension of the Private Finance Initiative (PFI) meant that, for a change, hospitals (and other public-sector projects) were built or rebuilt on time and on budget and properly maintained. However, a financial squeeze on the private -sector provision of care homes after Labour’s election has meant that the number of residential places has fallen from 520,000 in 1998 to 440,000, despite an ageing population.

8. Over-expansion of higher education

The government had the noble ambition to increase access to higher education to half the population. But it didn’t think through the consequences. This led to a ratcheting up of course fees financed by student loans at what are now usurious rates of interest. Outstanding student debt now totals £255billion; £30billion is expected to be written off each year by the end of the 2040s.

Meanwhile, the gap between graduate and non-graduate salaries has fallen sharply, while many jobs are no longer open to non-graduates. Moreover, professions requiring long years of study, such as medicine, put a ruinous financial burden on their practitioners.

9. Handing back part of the EU rebate

In 1984, Margaret Thatcher negotiated a 66% rebate of Britain’s net contribution to the EU, in recognition of its low call on funds in the Common Agricultural Policy. As a goodwill gesture to the EU, Blair reduced the rebate by £7billion; not significant in itself, but it irritated EU-sceptics in the UK. Arguably, it also gave the EU the impression that the UK would always fold in negotiations, so it felt no need to make concessions before the Brexit vote.

10. Poor crisis management

The global financial crisis blew up after Blair had resigned, but Blair must bear some responsibility for the credit-fuelled growth that led to it and for keeping Gordon Brown as his chancellor, enabling him to become prime minister. In 2007, Brown mistook the liquidity crisis at Northern Rock for a solvency crisis, undermining confidence in the banking system. Lloyds Bank was bullied into bailing out HBOS, critically undermining its own viability. And while the US government made a huge profit from rescuing the financial system, the UK didn’t.

Despite Blair’s abysmal record, David Cameron was happy to be regarded as “the heir to Blair” and did little to reverse the damage. As a result, the UK economy has persistently underperformed its pre-2008 trend path of growth, hampered by structural problems in both the public and private sectors. It may be possible to correct these and return the UK to the path it was once on, but only if the mistakes dating back to 1997 are first recognised.

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Summary

• The Bank of England’s Monetary Policy Committee met today to decide its latest UK interest rates decision.
• As expected, the MPC voted to hold rates at 3.75%.
• Last time it met, the MPC cut rates in a narrow 5-4 vote.
• Today's vote also came down to a 5-4 split in favour of holding UK interest rates: this was much narrower than most observers had expected.
• The MPC has indicated it will balance concerns over a weakening economy with the risk of persistent inflation.

| When will interest rates fall further? | UK inflation forecast | MPC meeting dates |

Good morning, and welcome to live coverage of today’s UK interest rate meeting at the Bank of England.

Experts overwhelmingly expect the Monetary Policy Committee (MPC) to hold rates at 3.75% today. Will we see a deviation from this prediction? It would come as something of a shock if so.

Whatever happens, stick with us here as we bring you live preview in the run-up to the decision, as well as reaction in its aftermath.

December’s inflation uptick makes a hold more likely

Inflation is arguably the most influential factor on MPC interest rate decisions. The Bank of England has a remit to keep inflation around 2%, and interest rate changes are the key lever it uses to achieve this.

Higher interest rates have the effect of limiting consumers’ disposable income. That, in theory, reduces demand across the economy, which has a dampening effect on inflation.

The latest bout of inflation appears to have peaked at 3.8% between July and September. It had been coming down faster than expected in the meantime, which helped the MPC justify a rate cut in December.

But last month’s inflation reading (covering December) showed a rise in inflation to 3.4%. While widely expected, this will likely discourage the MPC from making a second successive cut – something it hasn’t done since the first quarter of 2020, when the Covid pandemic looked set to collapse the economy.

"We expect the UK’s disinflationary trend to continue through 2026, with slack in the labour market steadily increasing,” said Grant Slade, economist at investment research firm Morningstar. “However, the Bank of England is likely to hold rates this month as it waits for further evidence that wage growth and broader price pressures are softening.”

When does the MPC announce UK interest rates?

The MPC’s decision will be announced today at 12pm.

We’ll bring you the result as it lands. Stay tuned!

The trajectory of UK interest rates

December’s cut was the latest in a gradual cycle of interest rate cuts that have seen UK base rate fall to 3.75%, from 5% in August 2024.

The steep rise in interest rates from January 2022 onwards reflects the Bank of England’s attempt to control inflation, which spiked in the wake of Russia’s invasion of Ukraine.

Throughout the recent cutting cycle, the MPC has never cut UK interest rates in two consecutive meetings. It isn’t expected to change that approach today.

Economists predict a rates hold

Persistent inflation combined with the cadence, to date, of the MPC’s interest rate cutting cycle means that most experts and economists expect rates to be held where they are today.

“The majority of MPC members anticipate further rate cuts will be required, but they're concerned about the potential strength of 2026 pay awards and their impact on inflation,” said Edward Allenby, senior UK economist at advisory firm Oxford Economics.

While the economy is in a precarious state, there hasn’t been enough fresh data, particularly on what is happening with inflation, since the last meeting to be able to justify a successive cut.

“The data flow since the MPC’s last meeting does little to change the risk balance between persistent inflation and weak growth,” said Robert Wood, chief UK economist at advisory firm Pantheon Macroeconomics.

What to watch for in today’s MPC meeting

Meetings like today’s, when the verdict on UK interest rates is almost a foregone conclusion, can feel like a damp squib. But there will still be key talking points: specifically, the split of votes among the nine-person MPC panel, and the forward guidance they issue.

Robert Wood, chief UK economist at advisory firm Pantheon Macroeconomics, expects a 6-3 vote split in favour of holding rates at 3.75%, while Edward Allenby, senior UK economist at advisory firm Oxford Economics, expects a 7-2 split.

“We don't think the recent data have been weak enough to convince a majority on the committee to vote for a February cut next week,” said Allenby. “Indeed, there's a good chance that the vote split will be wider than December's 5-4 decision, with just [Swati] Dhingra and [Alan] Taylor likely to vote for a cut.”

The minutes of the meeting published afterwards, will also be closely scrutinised by experts to gain a clearer picture of when UK interest rates might next be cut.

“Key things to watch here will be the debate around the weak labour market versus firming price pressures in survey data, including wage settlements from the Bank's Agents survey,” said Sanjay Raja, chief UK economist at Deutsche Bank. “We will be looking at positioning within the MPC and how much weight each member puts on each matter. Any dissenters beyond Taylor and Dhingra will be important to keep an eye on too.”

How are UK interest rates decided?

As we approach the announcement of today’s Monetary Policy Committee (MPC) meeting, it’s worth taking a look at who makes up the committee, and how it sets UK interest rates.

The MPC is made up of nine members. These are the governor of the Bank of England (currently Andrew Bailey) who serves as the committee’s chair, three deputy governors for monetary policy (Clare Lombardelli), financial stability (Sarah Breeden) and markets and banking (Dave Ramsden), the chief economist (Huw Pill) and three external members that are appointed directly by the chancellor (Swati Dhingra, Alan Taylor and Catherine Mann).

The committee assesses the available economic data in a series of meetings before voting on a proposal regarding UK interest rates put forward by the governor. All members then vote either for or against the proposal – if against, they are asked to state what alternative policy they would support. A majority is required for the policy to become set.

In the rare event of a tie (which requires at least two different alternative policy suggestions given there is an odd number of committee members), then the committee votes again.

What do you think will happen to UK interest rates?

It’s nearly midday, which means the MPC’s UK interest rates decision is nearly with us.

Which way do you see it going? Let us know in our poll:

BREAKING: UK interest rates held

To the surprise of absolutely no-one, the MPC has voted to hold UK interest rates at 3.75%.

The key variables today are the comments and outlook from the committee. We’ll bring you detailed analysis shortly.

MPC vote split surprisingly close

The headline result is not a surprise, but the tightness of the vote certainly is.

The UK interest rates hold went through with a 5-4 majority, meaning that, for the third consecutive meeting, Bank of England governor Andrew Bailey effectively cast the deciding vote.

Sarah Breeden, Swati Dhingra, Dave Ramsden and Alan Taylor all voted to cut rates by 0.25 percentage points.

Wage growth is trending in line with target-level inflation

Two of the surprise dissenters, Sarah Breeden and Dave Ramsden, both highlighted the fact that wages are trending downwards as in their rationale for voting for a cut.

"Wage growth is set to end this year at target-consistent levels; structural change in the labour market now appears less likely to have occurred; and slack is judged to be a little wider both now and over the forecast," said Breeden.

"Core disinflation is clearly progressing with cumulative weakening in the labour market" said Ramsden. "I am increasingly confident that wage growth will fall to target-consistent rates this year."

Will we see further UK interest rate cuts soon?

Many commentators expect the next cut to come in April rather than at the next meeting in March, but comments from other committee members could be read as undermining this assumption.

"New analysis and current developments have moved the appropriate time for a cut in Bank Rate closer," said Catherine Mann. Bank of England governor Andrew Bailey indicated that he sees "scope for some further easing of policy", but emphasised that he doesn't expect a cut at any particular meeting.

"A cut at the next Bank meeting in March is most certainly on the table," said Luke Bartholomew, deputy chief economist at investment firm Aberdeen. "And even if it takes a bit longer for the next cut to come through, we still think there is a strong case for rates to eventually fall to 3% later this year."

UK interest rates still trending downwards

Here’s how today’s UK interest rates decision looks against the historical trend:

“The Bank of England has pushed a big red pause button on interest rate cuts as caution remains the name of the game and policymakers assess flickering growth and stubborn inflation,” said Susannah Streeter, chief investment strategist at Wealth Club. “Although the signs are that the price spiral will be dampened down in the coming months, they’ve judged that it’s still too early to move, especially given signs that growth in the economy is showing tentative signs of making a comeback.”

Streeter also highlighted that the tight vote came as a surprise and perhaps signposts a rate cut sooner than some expected.

“It puts a cut in March still very much in the picture,” she said. “The labour market is showing weakness, Budget changes are set to bring down energy and transport costs and a wave of cheaper Chinese goods are heading this way. So, more policymakers could well be swayed to vote for lower borrowing costs next month.”

"A bus that may or may not be running"

The balancing act that the MPC's members are attempting is palpable in today's meeting minutes. On the one hand, there is a clear appetite to cut in order to bolster the economy, but timing this so as to keep inflation on a downward path is absolutely key.

"The Bank’s tone highlights how cautiously policymakers are approaching this stage of the cycle," said Patrick Farrell, group chief investment officer at investment manager Charles Stanley. "With signals from inflation and the labour market still mixed, they’re navigating a far more stop-start environment than in the past.

"At times, it feels like waiting for a bus that may or may not be running," said Farrell. "There’s no set timetable, and each move now depends on whether upcoming data gives the Bank enough confidence to act."

FTSE rises on MPC’s dovish hold

The stock market has not been having a good day today, but the unexpectedly tight vote does seem to have given a small boost for UK stocks.

The FTSE 100 climbed around 0.4% while the FTSE 250 climbed around 0.2% immediately after the MPC’s report was released, though both indices remain below yesterday’s close.

In very broad terms, lower interest rates tend to benefit stocks as they encourage economic growth and investment.

UK interest rates: inflation outlook is revised lower

Today’s MPC meeting notes included surprisingly dovish comments even from some members who voted in favour of holding interest rates at their present level.

The Monetary Policy report which has been released alongside today’s announcement reveals that the Bank now expects inflation to fall towards the target level of 2% sooner than had been expected. In fact, it states that headline CPI inflation could fall to 2.1% as soon as Q2 this year – largely thanks to the energy bills package unveiled in the Autumn Budget.

The last Monetary Policy report, published in November, put the equivalent figure at 2.8%.

How do interest rates affect your money?

In general, higher interest rates are good for savers (because they earn more interest on their savings) and bad for borrowers (because they pay more interest on their debt).

“Savers may welcome the prospect of higher returns for longer, but borrowers hoping for additional relief from high mortgage or debt repayments will need to stay patient for now,” said Alice Haine, personal finance analyst at online investment platform Bestinvest.

“Living costs remain high and borrowing costs are still elevated compared with the long era of ultra-low interest rates that followed the Global Financial Crisis,” Haine added. “Combined with the stealth impact of frozen income tax thresholds, this is making it harder for some households to balance the books.”

Recap: UK interest rates held at 3.75%

As a recap: the MPC held UK interest rates at 3.75% today, as widely expected, but the headline was a narrow 5-4 vote split (some experts had predicted as many as seven committee members voting to hold rates steady) and unexpectedly dovish comments from some committee members.

This has seemingly opened the door for a rate cut at the next meeting in March, something which most observers felt was unlikely ahead of today’s meeting.

The Bank of England now expects the rate of inflation to fall faster through the first half of this year than it did at the time of its November meeting, when it last published a Monetary Policy report.

Thanks for following live coverage of today's UK interest rates decision. We're going to end our coverage here at this point, but keep a close eye on MoneyWeek.com over the coming days as we bring you more analysis of today's decision and what it means for you.

Even by the standards of the Treasury, it has turned into a spectacular own goal. Over the past few years, Britain has pushed capital gains tax (CGT) significantly higher. The whole thing started, shamefully, with the last Conservative government, which reduced the tax-free allowance from £12,000 a year to just £3,000.

The system has become punitive under Labour, with the chancellor, Rachel Reeves, in her first Budget, raising the standard rate of CGT from 10% to 18% and the higher rate from 20% to 24% while also increasing the rate paid by entrepreneurs when they sell their business. The left of the Labour party is pushing for an even bigger increase, pressing for CGT rates to be equalised with income tax, which would take the top rate to 45%.

The results are now clear. According to the latest update from HMRC, in 2025 the amount collected from the tax actually fell by 8%, or by £1.3billion. The amount raised by CGT varies more than most taxes, depending on how well the stock market and property prices are doing. You only owe tax when you make a gain, and that doesn’t happen much when the markets have collapsed. Still, the evidence is striking. The higher tax brought in less revenue.

It’s not hard to work out why. With the allowance at £12,000 it typically made sense to sell an asset when you felt the time was right and most private investors would not end up owing too much tax. With an allowance of just £3,000, many will decide to hold on and avoid triggering extra tax liabilities.

It’s going to get worse this year. The latest revenue figures only reflect the first increase, not the Labour one from October 2024. At rates of 10% and 20% the tax was fairly affordable. If you made a 50% or 100% profit on an investment it is irritating if you have to pay a tenth of that to HMRC, but it is hardly the end of the world – you are still showing a handsome return. Most investors would pay the tax and move on. At 24% plenty are going to decide to hold instead. The result? The revenue raised from the tax will go down even further.

Rachel Reeves’s tax rises are likely to backfire

It is not going to stop there. There are a whole series of tax rises that are about to backfire spectacularly. It looks certain that Britain will raise significantly less from wealthy foreigners with non-dom status now that their tax breaks have ended. Not many of them want to pay punishingly high British taxes on their global assets given that they made their money elsewhere. They are already fleeing in droves to Dubai, Milan or the Caribbean. Far from bringing in an extra £33billion over the next five years, as the Office for Budgetary Responsibility forecast when the change was announced, it is likely to bring in less than ever, especially when all the VAT and council tax those people would have paid is taken into account.

Likewise, it’s starting to look as if the imposition of VAT on school fees will raise less money than forecast, as schools close down and as the government has to pay for the education of those children instead. The huge rises in business rates imposed in the 2025 Budget, a tax that collects £26billion a year for the Treasury, will almost certainly raise less than forecast as pubs and restaurants close down because they can’t afford their tax bills.

Stamp-duty revenue may drop if the fall in house prices in central London, hit by all the non-doms fleeing, spreads to the rest of the country. The rise in national insurance for employers is likely to backfire as companies cut back on staff. Even frozen income-tax thresholds may eventually backfire as people decide it is not worth the hassle working extra hours or taking a promotion if most of the money they might earn is taken from them in tax.

Britain has clearly hit the point on the Laffer curve beyond which higher taxes mean lower revenues. The government already takes 39% of GDP in taxes, one of the highest levels ever. It may well prove impossible to squeeze any more out of the economy. Instead, each rise will backfire, less revenue will be raised, and the government will have to borrow yet more to make up the difference. Capital gains taxis a warning sign of what lies ahead.

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A total of £872 billion is held in Britain’s ISA accounts, with almost £100billion of that added in the last year alone. I would hazard a guess that almost every subscriber to MoneyWeek magazine has one. Within an ISA, your money is completely free of income tax and capital-gains tax, and unlike with pensions, there is flexibility over when you can take it out. ISAs have become central to the way the British save and invest. With a £20,000 annual limit, it soaks up most of the spare money people have to put aside.

Now, they are starting to come under sustained attack. In the last Budget, chancellor Rachel Reeves reduced the amount that could be put into a cash ISA to £12,000 a year as of April 2027. There are reports that the taxman wants to go further and charge a 22% levy on cash assets held within a stocks and shares ISA, and is also looking at aligning the rate with income tax, so that 40% and 45% taxpayers would have to pay extra on any cash held in their ISA.

It sounds like an administrative nightmare. It will be hard for ISA providers to work out what percentage of a fund is in cash; whether a client is a standard or higher-rate taxpayer, or whether they have used up their dividend or personal allowances for the year. Some of the smaller firms, which may also be the most innovative, may simply decide it is no longer worth the hassle and give up. But the real problem is not just all the red tape that will now be imposed on a product that was designed for its simplicity. It is also the precedent.

The slippery slope with ISAs

The simple rule that the ISA is free of tax has now been breached and, once that taboo is broken, future chancellors can easily ramp up the tax levied on ISAs. After all, what counts as a cash holding? A money-market ETF? A bond fund? A high-yielding equity? The tax grab might start with simple cash balances, but it is not hard to see the reach getting extended, especially as clever fund managers come up with products that have all the characteristics of a savings account with a different wrapper. Perhaps only basic-rate taxpayers should be allowed relief on their entire holdings; or ISAs should be restricted to the holding of shares listed in Britain. Alternatively, perhaps there should be a £100,000 lifetime limit on contributions to an ISA, an idea already put forward by the Resolution Foundation, whose former boss, Torsten Bell, is now a Treasury minister. Or how about a special 10% income and capital-gains tax on any assets held within an ISA?

After all, the government is desperate to raise more money and is boxed in by its rash promise not to raise any of the three main taxes. That makes all the cash locked up in savings accounts a tempting target. After a few years, almost all the tax advantages may well have been stripped away.

Britain is returning to the 1970s

And yet that would be a tragedy. The ISA can be traced back to Nigel Lawson’s Personal Equity Plan first launched four decades ago. Gordon Brown put a new label on it, but it was basically the same vehicle. When it was started, it was part of the Thatcherite project to create a shareholding democracy. The theory was that if people owned shares, they would be independent of the state, it would increase the amount of capital available to British industry, and, perhaps most importantly of all, it would build support for free markets.

When industries were privatised, the shares were sold at a discount, and many people put them straight into their Pep/ISA and held onto them. If enough people had a stake in the system and were benefiting from it personally, then they were far more likely to be suspicious of higher corporate taxes or more regulations for business.

It is arguably the last surviving remnant of the Thatcher reforms of the 1980s. We no longer have a flexible labour market. Our rate of corporation tax is about average for Europe and no longer one of the lowest. Our top rate of income tax is punishingly high and kicks in at a very low level, while inheritance taxes are among the highest in the world. The trade unions are allowed to become steadily more powerful. With Great British Energy and Great British Rail, we are even renationalising major industries. The Labour government has now started to destroy the last relic of that era – and the British economy will complete its journey back to the dysfunctional 1970s.

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UK inflation: summary

• The Office for National Statistics (ONS) has released the latest UK inflation data today (21 January).
• The data shows the Consumer Price Index (CPI) measure of inflation rose by 3.4% in the 12 months to December
• Analysts expected CPI to have risen by this amount; the Bank of England’s latest forecast projected a 3.5% increase.
• In the 12 months to November, CPI rose by 3.2%, below analyst predictions that had been as high as 3.6%.
• The Bank of England projects that CPI will fall to 3.0% in January, and to 2.5% by the fourth quarter of 2026.

| What is inflation? | Upcoming CPI release dates | Your personal inflation rate |

Good afternoon, and welcome to our coverage of the latest UK inflation data.

The Office for National Statistics (ONS) announces the latest Consumer Prices Index (CPI) inflation data, covering the year to December 2025, tomorrow morning.

The previous release, covering November, showed a surprise drop in year-on-year inflation to 3.2%; the Bank of England had forecast a reading of 3.4% while some analysts had forecast as high as 3.6%.

But December’s read could paint a gloomier picture. The Bank of England’s latest available projections (dated 5 November) expect CPI to have risen to 3.5% in the 12 months to December, and other analysts also expect UK inflation to have risen from the previous month.

Follow us here at MoneyWeek for rolling preview analysis ahead of tomorrow’s announcement, plus live coverage of the release and reaction tomorrow morning.

Economists expect UK inflation to have risen in December

The latest Bank of England forecasts point to a jump to 3.5% in CPI inflation tomorrow.

These forecasts are a little dated – they were included in the Monetary Policy Report that accompanied the MPC’s last-but-one meeting, on 5 November. There have been two inflation data releases (covering October and November) since then, and both reads undershot expectations.

But economists still broadly forecast UK inflation to be higher in the year to December than it was in the year to November.

There is some uncertainty over the date on which inflation data will have been gathered; 9 December would be four weeks after the previous data collection, but it is unusually early in the month.

The alternative, 16 December, is a more appropriate date but would make it the fifth five-week gap between collections of 2025, and it is unusual to have that many five-week gaps in a calendar year.

The collection date could materially change the outcome, as prices tend to increase in the run-in to Christmas.

Robert Wood, chief UK economist at Pantheon Macroeconomics, forecasts CPI to have risen 3.3% assuming that data is collected on 9 December, rising to 3.4% if it is collected on 16 December.

Sanjay Raja, chief UK economist at Deutsche Bank, expects a headline CPI inflation figure of 3.4%, though he said this could be higher if (as he expects) data is collected on the later date.

When is UK inflation data announced?

UK inflation data for the 12 months to December will be announced at 7am on 21 January.

We will bring you live analysis and reaction to the ONS data tomorrow morning following the release.

UK inflation's recent history

It has been a turbulent few years for UK inflation.

Following the Covid pandemic, inflation was running at historically low levels – just 0.2% in August 2020. Most economists would argue that inflation rates this low are economically unhealthy; 2% is regarded as the optimal rate, which is why the Bank of England targets this level.

From the second half of 2021, though, the rate of inflation rapidly passed beyond this optimal rate, peaking at 11.1% in October 2022.

Since then, inflation has gradually been trending downwards. The 2024 Autumn Budget caused a temporary bump as inflationary measures like increased employer National Insurance contributions came into effect from April, but following a three-month plateau at 3.8% over the summer, inflation now appears to be coming down.

What is CPI inflation?

You might be asking yourself, what is inflation?

Inflation is a measure of the pace at which prices are increasing within an economy. A higher rate of inflation means that prices rose faster, while a slower rate means they fell slower.

A fall in inflation doesn’t indicate a fall in prices, unless the inflation number turns negative (which is known as deflation). But a fall in inflation from, say, 3% to 2% means that prices still rose, just at a slower rate than in the previous period.

There are various different ways to measure inflation. The Consumer Prices Index (CPI) is viewed as the key metric by economists, but there are others including Consumer Prices Index including owner occupiers’ housing costs (CPIH), which includes the costs of owning, maintaining and living in a home, and the Retail Prices Index which includes costs associated with home ownership.

The longer-term UK inflation outlook

UK inflation looks set to come in somewhere above 3% in the December release.

But what is the longer-term outlook for UK inflation, and when is it likely to return to the 2% level that economists target?

Analysts at the Bank of England expect UK inflation to fall to 3.1% in the first quarter of this year, and to fall below 3% in the second quarter. Inflation is expected to average 2.5% in the final quarter of the year.

In Q1 of 2027, the bank forecasts that inflation will have fallen to close to its target rate of 2%, and that it will fall below it the following quarter.

What does inflation mean for your money?

Inflation erodes the purchasing power of money.

It is related to interest rates, in that policymakers will generally raise rates when inflation is high (in order to reduce the amount of available money within the economy, which lowers demand and thus prices) and reduce them when inflation is low (in order to stimulate more economic activity).

But the relationship isn’t perfect, and other factors – particularly the overall health of the economy – impact interest rates. The UK is currently enduring a period of elevated inflation alongside lacklustre growth, meaning that interest rates are falling despite inflation running well above the 2% target rate.

That is bad news for savers in particular, because the returns on saved cash may not beat inflation, meaning that savings held for the long term are actually losing value in real terms.

“Falling inflation puts the spotlight firmly on getting the best possible return,” said Harriet Guevara, chief savings officer at Nottingham Building Society. “As expectations grow that interest rates will start to come down, savings rates are likely to follow. That makes now an important moment to shop around, while competition between providers is still delivering strong returns.”

The impact of inflation on long-term cash holdings is also a reason to consider starting to invest some of your disposable income.

Poll: Do you think UK inflation rose in December?

Let us know your thoughts by voting in our poll:

Thank you for following our preview of the latest UK inflation data release today. We're going to pause coverage here for this evening, but join us first thing tomorrow morning as we report on the latest UK inflation figures live from 7am.

Good morning and welcome back to our live UK inflation blog.

The Office for National Statistics (ONS) will be announcing December's figures shortly.

Stay with us for live coverage, rolling reaction and analysis.

BREAKING: UK INFLATION ROSE TO 3.4% IN DECEMBER

The UK’s Consumer Price Index (CPI) rate of inflation rose in the 12 months to December in part due to higher tobacco prices, the ONS said.

A rise in the cost of airfares, likely due to higher prices over the Christmas period, also drove the slight uptick on the month before.

The ONS said rises in the price of tobacco and transport were partially cancelled out by falls in the cost of furniture and household goods and recreation and culture activities such as TV subscriptions and trips to the cinema.

Prices across the health and communication sectors also fell.

The Consumer Price Index (CPI) rate of inflation is not the only measure tracked by the ONS.

It also releases Consumer Price Index including owner occupiers' housing costs (CPIH) data which includes the costs of owning, maintaining and living in a home.

It is considered the most comprehensive measure of inflation published by the ONS.

The ONS has published the CPIH measure of inflation for the 12 month to December today (21 January), which shows a rise of 3.6%, up from 3.5% in November.

December uptick 'short-lived'

The latest CPI inflation data is a blow for the Bank of England (BoE) which has a 2% target it is supposed to meet.

However, Alice Haine, personal finance analyst at investment platform Bestinvest by Evelyn Partners, said the December figures were just an uptick and inflation would come down in early 2026.

Haine said: "The combination of tax rises and spending restraints introduced in the Autumn Budget, along with a cooling labour market and slowing wage growth, are likely to act as a drag on prices."

Haine also pointed to core inflation, which strips out more volatile items such as food, alcohol and tobacco, holding at 3.2% in December.

Core inflation is considered important because it provides a clearer picture of long-term price rises.

How has inflation changed over time?

Both the CPI and CPIH measures of inflation, while rising slightly in December, have broadly fallen from peaks of 11.1% and 9.6%, respectively, in October 2022.

The CPI rate of 11.1% in October 2022, driven in part by soaring energy prices, was the highest the measure had been for four decades.

What does the latest inflation data mean for interest rates?

The Bank of England most recently cut interest rates from 4% to 3.75% in December as it looks to kickstart growth in the UK economy.

However, rising inflation could cause the bank's Monetary Policy Committee (MPC), which sets rates, to take a more cautionary approach at its next meeting in February.

Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales (ICAEW), said the December inflation figures made a February rate cut "look improbable", "particularly as policymakers may want to assess the effect of escalating geopolitical tensions before loosening policy again".

A closer look at the figures

The main drivers of the uptick in inflation in the 12 months to December were alcohol and tobacco, transport and food and non-alcoholic drinks.

Here's a breakdown of exactly how much prices rose across these categories.

Alcohol and tobacco

Alcohol and tobacco prices rose by 5.2% in the 12 months to December. This was a sharp increase from 4% in the 12 months to November.

The ONS said the uplift was mostly caused by a rise to Tobacco duty in November.

Transport

Prices across the transport sector went up by 4% in December, a rise from 3.7% in November.

The spike was mainly caused by an increase in air fares, which rose by 28.6%.

Food and non-alcoholic drinks

Food and non-alcoholic beverages prices rose by 4.5% in the 12 months to December, up from 4.2% in the 12 months to November.

Chancellor reacts to the latest inflation figures

The chancellor Rachel Reeves has responded to this morning’s inflation data, saying that driving down people's bills and everyday costs is her "number one focus".

"At the Budget I announced £150 off energy bills, a freeze to rail fares for the first time in 30 years, a freeze to prescription charges for the second year running, and an increase to the national minimum and living wage.

"Money off bills and into the pockets of working people is my choice. There’s more to do, but this is the year that Britain turns a corner."

The policies announced by the government to drive down people's bills are forecast by the Office for Budget Responsibility (OBR) to lead to a reduction in CPI inflation of 0.4 percentage points in the 2026/27 financial year.

Savers face falling returns despite inflation outlook

Caitlyn Eastell, finance expert at Moneyfacts, said the latest inflation data signalled bad news for savers.

The Moneyfacts Average Savings rate sits at 3.33% as of 21 January, lower than December's rate of inflation.

Anyone with a savings account paying this level of interest is effectively losing money in real-terms and should switch to an account paying a higher rate.

Eastell said: "January is the ideal time for savers to set new financial goals and to check if their savings are working as hard as they can."

According to Moneyfacts, the best-paying easy access account is currently with Chase, which is paying 4.41% interest (including a bonus rate).

The best one-year fixed bond is with Marcus by Goldman Sachs, paying 4.55%. The best easy access ISA is with Plum, paying out 4.28% in interest.

What does higher inflation mean for mortgage rates?

The Bank of England can increase interest rates to curtail rising inflation, but this tends to lead to higher mortgage rates.

That said, the central bank is keen to kick start the economy, so while immediate further rises in interest rates are not likely, mortgage borrowers may have to wait longer for cuts.

David Hollingworth, associate director at broker L&C Mortgages, said: "The rise in the rate of inflation in December was not unexpected but is a larger bump than many anticipated. That could be enough for the Bank of England to pause any thought of another cut when they meet in February."

Hollingworth pointed out a lot of lenders had already priced further cuts to interest rates in 2026 into their fixed-rate mortgages, but today's inflation data could "mean that we’re in for a period where the brakes are applied and mortgage rates flatten out".

Housing and household services the largest contribution to CPIH annual inflation rate for 18th consecutive month

Households will feel the effects of inflation differently

Because the ONS calculates inflation based on a representative basket of goods and services, which is subject to change, households will experience it differently.

For example, if more of your spending is weighted towards food or travel, any rises in these categories will be felt by you more.

Charlotte Kennedy, chartered financial planner at Rathbones, said: "While headline inflation guides monetary policy, it rarely captures the full picture of how price pressures are felt across the economy."

What items were added to the ONS's basket of goods and services in 2025?

As previously mentioned, the ONS tracks price changes across a range of goods and services when reporting its inflation data. What is included in this basket of goods and services is subject to change each year.

In 2025, virtual reality (VR) headsets were added, as well as men's sliders, cushions and ready-to-eat noodles.

Other items already in the basket were taken out, including fresh diced or minced turkey.

When will January's inflation data be released?

The ONS releases inflation data each month for the preceding month. That's why the data released today covers the month of December.

The ONS will release inflation data for January on 18 February.

You can find out when the ONS is set to release inflation, GDP and wages data on its website.

Inflation rises for first time in five months

The last time the CPI measure of inflation rose was in July 2025, when it ticked up to 3.8% from 3.6% the month before.

It stayed at 3.8% in August and September, fell to 3.6% in October and then slowed to 3.2% in November.

Where is inflation headed next?

It's impossible to say for sure where inflation will head next, but the Bank of England has made predictions.

It projects that CPI will fall to 3% in January and to 2.5% by the fourth quarter of 2026.

Further down the line, it expects CPI will slow to 2% by the end of 2027 and then rise to 2.1% by the close of 2028.

Recap: UK inflation rose to 3.4% in December

Here’s a recap of this morning’s UK inflation headlines:

• UK inflation, as measured by the Consumer Prices Index (CPI), rose to 3.4% in the 12 months to December, up from 3.2% in the year to November.
• Alcohol and tobacco, transport and food and non-alcoholic drinks were the main drivers of the uptick in inflation, particularly a 28.6% increase in air fares.
• The jump is widely expected to be short-lived. Bank of England forecasts expect UK inflation to fall to 3.0% in January.

Could petrol price deceleration lower UK inflation?

One counterweight to the general acceleration in UK price increases in December was a slowdown in the pace at which petrol prices rose.

Petrol prices rose by 1.3 pence per litre between November and December 2025 compared to 1.5 pence per litre in the same period a year before.

“Petrol pump price rises slightly levelled off,” said Scott Gardner, investment strategist at J.P. Morgan Personal Investing. “We could see further weakening in the months ahead with recent falls in global oil markets expected to feed through to prices at petrol station forecourts.”

One to watch for motorists and consumers in general over the coming months.

We're going to end our inflation coverage here for today. Thank you for following, and visit our homepage for all the latest personal finance and investing news.

There’s one very easy prediction to make for 2026 – Keir Starmer’s government will make a whole series of U-turns. The one thing we know for certain about this government is that, as soon as it runs into any serious opposition, it quickly changes its mind. We saw that early on with the reversal of the decision to scrap the winter fuel allowance for pensioners, followed by the decision to abandon the very modest attempt to control the spiralling cost of welfare. Likewise, just before Christmas, it more than doubled the threshold at which farmers have to pay inheritance tax on their estates after widespread protests. A clear pattern has been established. A policy is announced, it sparks a backlash, and the government quickly caves in to the pressure.

It is not hard to work out where the next U-turns will come from. The farmers may have been exempted from IHT on what is in effect a small business, at least up to a value of £2.5million. But other businesses owned and run by families will still have to pay huge levies when they are passed on. Almost every country in the world exempts family firms from the tax for a reason. If a firm is worth £10million, it is usually impossible for the heirs to raise 20% of its value to pay the tax bill, so it has to be sold or broken up instead.

And the bill is actually greater than 20%. As James Dyson has pointed out, a dividend has to be paid to meet the tax bill, which is also subject to tax, meaning the real rate is 40% of the company’s value. That is crazy. Almost none of Britain’s estimated five million family businesses, which account for almost half the total number of jobs in the country, will survive that. Once it becomes clear how much damage the policy is doing, the tax rise will be reversed.

The next reversal will be in business rates. At the last Budget, chancellor Rachel Reeves hiked the amount that pubs, cafes and restaurants have to pay to local councils. In many cases bills doubled. Given that many of these businesses were already struggling with rises in national insurance and the living wage, it is not surprising many of them will now close. Pubs were already shutting at a rate of one a day in 2025. As it becomes clear how many are folding, that rise will be scrapped as well.

The Employment Bill is not likely to last much longer. We have already seen one major U-turn, with the decision that full employment rights will only kick in after six months instead of on day one. But that won’t be anything like enough. We are already seeing a massive drop in hiring as companies decide that employing anyone in Britain is too risky and expensive. Unemployment has been rising steadily, more and more people have quit the workforce, and new graduates face the worst jobs market in a generation. The two-year rule that allowed companies to try a person out over a serious length of time will have to be restored sooner or later.

Finally, the crackdown on landlords has now clearly gone too far. After the Budget, you now have to pay a higher rate of tax on rental income, even though the job involves more work and risk than regular employment. As apartments vanish from the market, the government will have to ease up on that tax as well. Countries such as Portugal have introduced a lower rate for landlords to encourage more investment in the sector. At some point, Britain may have to do something similar. A functioning economy needs properties to rent, and they won’t exist if they are taxed out of existence.

Keir Starmer's policies are catastrophic for businesses

Add it all up, and one point is clear. The government has imposed a whole series of policies that are starting to have catastrophic consequences for businesses. Eventually even the chancellor will notice. The government will end up U-turning on all of them. There is just one catch. Much of the damage will already have been done. Once a pub has closed down, it won’t re-open even if its rates have been reduced. Once a family business has been sold off, it won’t be handed back to the original owner even if the inheritance tax is reduced, nor will entrepreneurs come back from Dubai. Each policy will do real damage. Perhaps by the end of the year, the Treasury team will have learned the lesson of that and start working out that they should listen to businesses before they impose a tax rise instead of afterwards – although, right now, no one should hold their breath.

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There is good news and bad news about the prospects for Britain's economy. First, the good news. The UK’s problems are relatively easily solved. A lot of money is pointlessly being thrown down the drain by the government, such as paying Mauritius to get rid of the Chagos Islands, rejoining the Erasmus scheme (to curry favour with the EU and the pro-EU lobby in the UK) and on asylum hotels. There are taxes that could be cut that would both raise revenue and stimulate growth, such as the taxes on oil and gas production in the North Sea, bringing back VAT rebates for tourists and reintroducing non-domicile status. Many of the recent tax increases, such as on inheritance, capital gains and private education, will raise little if any revenue, but harm growth. They could swiftly be reversed.

Curbs on welfare benefits and public administration would save money and increase incentives to work, as would restricting immigration to those with taxable employment. There is no need to cut public services, such as health, education and law and order, if productivity is improved. The NHS has made a good start with a 2.5% increase in 2024-2025, amply supported by data and anecdotal evidence. There is much more to go for, reducing the need for extra money to improve services. Deregulation would deliver savings for both the private and public sectors.

The resulting improvement in growth would lower the budget deficit further and lead to lower gilt yields, reducing the cost of financing the UK’s debts. This would enable tax cuts and create a virtuous circle of economic growth, improving public finances and prosperity, as experienced by Sweden in recent decades.

How Britain can learn from the US

The results of such a course of action are starting to be seen in the US, despite the perhaps premature tax cuts of 2025. Harsh restrictions on immigration and tariffs on imports have not, as many expected, been detrimental to growth, which is expected to have been 2% in 2025 and to accelerate in 2026, driven by productivity growth of 3.5%. Unemployment is ticking up, but while the government is shedding workers, the private sector is picking them up – the inverse of the situation in the UK.

Despite better growth, both bond yields and inflation in the US are lower than in the UK. The budget deficit only fell 2% in the year to September 2025, but relative to gross domestic product (GDP), it fell from 6.3% to 5.9%. Since then, the deficit has fallen 27% year-on-year, so a fall to 4% of GDP is likely in 2025-2026. The debt-to-GDP ratio in 2026 would then still rise, but fall thereafter.

There have been distinct structural improvements in the UK since 2008. Before then, growth was increasingly driven by private-sector credit expansion. This meant overindebted companies, unstable banks, debt-financed consumer spending, property speculation, too much mortgage debt and low savings, all of which was unsustainable. Since then, the savings rate has doubled, the proportion of households with mortgages has halved (and 80% of those with mortgages are now on fixed rates) and private-sector finances are much stronger. Future growth in the UK is likely to be much better balanced than in the past.

Don’t expect a change of course under Labour

The bad news is that the economy is unlikely to improve while the current government is in office – in fact, things are likely to get worse, with a stagnating economy, a persistently high budget deficit, stubborn inflation and rising unemployment. An early election is very unlikely; governments facing certain defeat, as in 1997, 2010 and 2024, hang on until the last possible minute, which means mid-2029. It is even possible that the government could delay the election beyond five years by changing the law that governs the dissolution of Parliament.

Some might hope that a funding crisis in the gilts market will force the government to perform a drastic U-turn in economic policy, but the precedent from 1976 is not encouraging. Then, there was only an L-turn, followed by three years of precarious stabilisation with some modest improvements. There will be no Damascene conversion. Just as likely is that the government will use the next three years to make life as difficult as possible for its successor through regulation, obstructive laws and strengthening its grip on the civil service and public sector in general. The next government may need to wield a chainsaw rather than follow a more evolutionary path.

Javier Milei has proved in Argentina that no country is in such desperate economic straits that it cannot be turned around swiftly and relatively painlessly by the right measures, speedily implemented. Moreover, this can be a recipe for electoral success. The UK has not passed the point of no return, as Argentina seemed to have done long ago, but people, though not necessarily investors, will have to wait.

Since Milei’s election in October 2023, the price of Argentina’s 5% 2038 bond has trebled. Bond investors in the UK may despair of the current government, but they will not want to be caught out when the tide turns. This argues against a funding crisis; too many investors would see such a crisis as a buying opportunity. Similarly, those waiting to buy UK equities in such a crisis are likely to be disappointed.

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If you want proof that British manufacturing isn’t dead, take a trip to an unassuming stretch of Stoke-on-Trent. There, on the same site it has occupied since Victorian times, sits Goodwin (LSE: GDWN), a heavy engineering group that has become one of the most profitable specialist manufacturers in the country.

It may not be glamorous, but Goodwin produces the components that keep critical national infrastructure running, such as precision-cast nuclear-waste containers for Sellafield, high-integrity parts for naval propulsion systems and specialised valves for the liquefied natural gas (LNG) industry. These are the bits that no one can afford to get wrong; and its excellence in these areas is why Goodwin is so profitable. But following its tremendous run, can investors still afford the shares?

Goodwin is keeping it in the family

Goodwin was founded in 1883 by Ralph Goodwin and, unlike most of its peers, has remained firmly under family control ever since. The modern business is still chaired by a Goodwin, still run by Goodwins, and still majority-owned by the Goodwin family.

Normally that might raise questions about governance. In Goodwin’s case, it has been its greatest strength. Family ownership has allowed the group to invest patiently over decades, avoiding the usual temptation to juice short-term profits. Instead, it has focused on landing long-horizon contracts where quality and reliability matter more than price. This persistence explains why the business is so well respected in industry. Its decades of excellence give it the kind of reputation that is almost impossible for a newcomer to replicate.

One thing that sets the business apart is a bold strategy to embrace change rather than be hostage to it. Ten years ago, Goodwin looked tied to the oil and gas market. When oil prices collapsed, the company faced a choice: to shrink with the market or reinvent itself. It opted for reinvention. The group pushed aggressively into sectors with high barriers to entry, such as defence, nuclear power and other specialist markets where components require complex metallurgy and spotless quality records.

More striking is what comes next. Management, usually conservative to a fault, now expects pre-tax profits to double to more than £71 million this financial year. The firm has a record £365 million order book to back up that forecast, stretching over many years thanks to nuclear-decommissioning projects and the UK’s next generation of nuclear-powered submarines.

Goodwin’s financial discipline is unusual

Unlike many industrial companies, Goodwin is not a cyclical business that generates modest but unspectacular returns. It has become a high-margin supplier of mission-critical parts to programmes that governments and businesses cannot cancel.

Goodwin’s financial discipline is unusual. Instead of loading up on debt to fund new capacity, it uses what it calls a customer-funded investment model. In practice, this means major capital expenditure is tied directly to long-term customer contracts. The customer commits; Goodwin invests. It’s incredibly conservative and effective. Cash generation has surged. Net debt has collapsed and is heading for zero. The board has responded with a 111% increase to the ordinary dividend, plus a large special dividend for good measure.

In a market where many engineering groups rely on hefty borrowings or dilutive equity raisings to grow, Goodwin stands out. It’s expanding while also deleveraging. Most investors will be focused on that. Yet Goodwin has a second act that could be worth more than the whole group in time. That business is Duvelco, its advanced-materials subsidiary, built around a patented polyimide called Ducoya. This has chemical characteristics that make it ideal in industries such as aerospace, which supports exceptionally high margins as its customers place a premium on proven performance. Supplying these markets requires technical qualification and rigorous testing. This long, complex accreditation process creates exactly the sort of barrier to entry that Goodwin has historically excelled at building.

Goodwin has broken its rule by funding the new pressing facility entirely from its own cash. That’s unusual for a group that normally relies on customer-backed spending. Management clearly believes Ducoya could become a profit engine in its own right. Yet, for all the optimism, the forecasted doubling of profits to £71 million doesn’t include contribution from the subsidiary.

Goodwin is worth the premium

Goodwin’s promotion into the FTSE 250 has put it firmly on the radar of index trackers and mainstream funds. The shares have re-rated sharply and now trade at a clear premium to traditional industrial peers.

Is that a problem? Possibly. This is still a specialist engineering company with limited free float, large exposure to big government projects and a management team that communicates sparingly. Those factors can make the shares volatile. Yet few listed UK manufacturers can point to a multi-decade record of quality with a pipeline of government-backed projects. On top of that, it has a near debt-free balance sheet, rising margins and an exciting advanced-materials subsidiary. The premium multiple reflects this reality.

The shares aren’t cheap, but neither is what you’re buying. For patient investors willing both to tolerate limited liquidity and trust in the family’s long-term stewardship, Goodwin remains one of the few genuinely high-quality industrial compounders left on the London market. If you’re already on board, it’s a strong hold. If you’re not, it’s one to buy on any meaningful pullback.

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Why is Modern Monetary Theory back in the spotlight?

The leader of the Green Party, Zack Polanski – whose more assertive, charismatic and left-populist tenure has seen the party dramatically surge in the polls to within a few points of both Labour and the Conservatives – speaks about economics and fiscal constraints in a way that’s ominously familiar to observers of the Modern Monetary Theory (MMT) debate.

Last month, Polanski told The New Statesman that “the fiscal rule we need to have is to make sure that inflation doesn’t go higher than the skills and resources that we have in our economy”. In a TV interview, he told Laura Kuenssberg that higher taxes on the wealthy will not be needed under his gigantic public spending plans since “this isn’t about creating public investment, we can do that anyway, we don’t need to tax the wealthy to do that”.

He further argued that loans from the Bank of England are “money we owe to ourselves, it’s not borrowing or a debt in any real sense”. In other words, all classic MMT stuff.

What is Modern Monetary Theory?

MMT is a broad and loose term for a group of economists and adherents, rather than a precise set of policy prescriptions. But essentially MMT is a set of ideas that came to prominence in the 2010s – and popularised by Stephanie Kelton’s book The Deficit Myth – which rest on the assertion that, for a currency-issuing government such as the UK’s, debt is not a significant constraint, at least compared with inflation; that macroeconomic policy can and should be managed through fiscal rather than monetary policy; and that it doesn’t matter if the two are blurred.

In orthodox economics, the idea of printing money to solve a nation’s problems is near-universally seen as a very bad one. In contrast, MMT proposes that nations that issue their own “fiat” currencies can freely create and spend their own money, and that this need not devalue the currency, create inflation or lead to economic meltdown.

What else does it say?

That governments should use their fiscal budgets to “manage demand and maintain full employment”, says The Economist – that is, tasks now assigned to monetary policy, set by central banks. It also holds that the main constraint on government spending is not the harsh realities of the bond market, but the availability of underused resources, such as jobless workers. Raising spending when the economy is already at capacity can lead to rapid inflation, thus the purpose of taxes is to keep inflation in check. “Spending is the accelerator, taxation the brakes. Fiscal deficits are irrelevant as long as unemployment is low and prices are stable.”

Thus, in the MMT worldview, the established idea that high public debt is a drag on economies, and a burden on future generations, is turned on its head. Proponents argue that, on the contrary, private citizens and businesses tend to do better in countries running high levels of government (or fiscal) debt. Taken to its logical extreme, MMT allows high spending without taxes or borrowing – a truly radical idea sometimes derided as the Magic Money Tree.

Why has Modern Monetary Theory been taken seriously?

Because utopianism is seductive and contagious. Although MMT has been widely attacked by mainstream economists (including well-known left-leaning economists, such as Paul Krugman), its attractions are obvious in terms of funding ambitious spendthrift political programmes – especially given the low-growth environment since the great financial crisis.

Many economists (not just left-wingers) think that a too-conservative, “austerity” approach to deficits has led to needlessly contractionary policies, especially during recessions (for example, in the UK in the early 2010s). At the very least, MMT offers a useful critique of the too-simplistic analogies between government budgets and household finances that dominate public discourse.

And proponents would argue that MMT aligns with empirical observations that have embarrassed orthodox macroeconomics. For example, Japan has sustained very high public debt levels for decades without triggering inflation or a bond-market revolt.

But it is wrong?

Yes. At its heart, MMT stems from “a question that young children often ask”, says Christopher Snowdon in The Spectator. If there are so many poor people in the world, why can’t we print lots of money and give it to them? The answer is that we can. As Alan Greenspan once put it, “there’s nothing to prevent the federal government creating as much money as it wants”.

The trouble is that printing money won’t increase the number of goods and services. It will only make them more expensive thanks to inflation. As the Bank of England ex-chief economist Andy Haldane expressed it, Modern Monetary Theory is not modern (it is a descendent of discredited ideas from the early 20th century), not monetary (it’s a political project) and not a theory (more wishful thinking).

What should investors do?

Not worry too much for now. Most analysts thought that, on the left, the post-Covid inflation spike had killed off MMT for good. On the right, the final nail in the coffin was – ironically enough – the supposedly pro-growth Truss-Kwarteng mini-Budget of 2022, which demonstrated that excessive borrowing can indeed cause financial distress for a country without an international reserve currency.

But investors might want to remain alert for further signs among the leadership of political parties of MMT-style thinking. British politics is in a time of extraordinary flux and the years ahead may well produce unlikely coalitions that would have seemed absurd even a few years ago. In 2017, Jeremy Corbyn’s Labour party won 40% of the popular vote with his plan for “People’s QE” – a first cousin to MMT that proposed printing money to fund direct government investment. MMT is a form of populist thinking that has the potential to be very popular indeed.

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If you are a mother juggling the demands of raising a family while trading commodities for a hedge fund, and you also happen to be hacked off with your employer, then 2026 could turn into a very good year. The Employment Rights Bill currently making its way through Parliament, is about to award you lots of extra rights. There is just one catch. It will also make firms very reluctant to hire anyone – crushing the economy at a moment when it is already stagnating.

The Bill, being driven through by junior minister Kate Dearden, is likely to turn into one of the most significant reforms of a Labour government that, in most respects, has done very little apart from putting up taxes to spend more on welfare. We already had a good idea that it was likely to be very damaging. But as the small print has started to emerge as it makes its way through Parliament, it is turning out to be far worse than anyone had feared.

Take salary caps, for example. Right now, the law limits the amount a tribunal can award to £118,223, or one year’s salary. After negotiations with unions, that will now be scrapped, allowing potentially unlimited claims against firms. It is not hard to see how that is going to end up.

A star trader in the City, or an exceptionally well-paid CEO, might be making £1 million or more a year, and they will now be able to sue for several times that amount if they feel they have been discriminated against, or unfairly dismissed. It will create huge incentives to game the system, simply because anyone on those kinds of earnings will be able to hire the best lawyers to make a claim, and might well make themselves several million by doing so.

The cap was designed to ensure the tribunal system was mainly there to protect low-paid workers from exploitation, but now it will be used just as frequently to secure vast payouts for the highest paid.

Or take working mothers. The Bill will make it impossible to dismiss women who are pregnant, on maternity leave, or for six months after they return to work. Persistent lateness, poor performance, or a bad attitude won’t count, and even a conflict of interest, such as shares in a rival company, might in some cases not be enough. In effect, they will become almost a specially protected class, against whom very limited action can be taken. Given that there are around six million working mothers in the UK, that is no joke.

And this comes on top of all the extra rights that were already in the first draft of the legislation. Employees will have the automatic right to ask for flexible working from day one, instead of in exceptional circumstances, and if courts beef up that right, as they almost certainly will, then it will essentially be up to staff to decide when and where to work.

Zero-hours contracts will face lots of fresh restrictions. Statutory sick pay will be available from the first day someone reports as feeling unwell. Parental leave will be mandatory from day one in a new job instead of kicking in after an agreed term. Anyone with more than 250 staff will have to produce an annual “gender equality plan”. The list goes on and on.

Impact of the Employment Rights Bill

That is going to be a disaster for the labour market. Staff should, of course, be well-treated and protected. But that is best achieved through a strong economy that generates lots of jobs so that people can pick and choose whom they work for, instead of smothering the market in so much red tape that no one wants to employ anyone in the first place.

The tribunal system is already clogged up, with the latest Ministry of Justice figures showing the number of claims in the pipeline has reached an all-time high of more than half a million. An extra 330 pages of legislation is only going to add to that number.

Only this week, the unemployment rate rose to 5.1%, its highest level in five years, and millions more people have effectively withdrawn from the labour market and are living on sickness benefits instead. The number of job vacancies fell for the second month in a row in November and has now reached its lowest level since 2025. For new graduates, the market has rarely been so weak.

With the rise in national insurance, it was already a lot more expensive to hire in the UK. Soon it will be impossible to get rid of them if they don’t work out. Once the Bill becomes law, expect a full-scale collapse in hiring. Very soon, it will not be financially viable to employ anyone in the UK.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

Summary

• The Bank of England’s (BoE) MPC has cut interest rates from 4% to 3.75%
• The MPC last met on 6 November when it held rates at 4%
• The market was widely expecting the MPC to lower interest rates following weakening jobs data, slowing inflation and the UK economy stagnating

| When will interest rates fall further? | UK inflation forecast | MPC meeting dates |

Bank of England’s MPC digesting economic data

Good afternoon, and welcome to our live coverage ahead of tomorrow’s announcement from the Monetary Policy Committee (MPC) on whether it will raise, hold or cut UK interest rates.

The meeting follows a string of macroeconomic news for the UK.

Data published by the Office for National Statistics (ONS) today (17 December) revealed that inflation as measured by the Consumer Prices Index (CPI) slowed to 3.2% in the 12 months to November. This is down from 3.6% in the 12 months to October.

Labour market figures released yesterday (16 December) showed UK unemployment rose to an almost five-year high of 5.1% in the three months to October.

The latest GDP figures from the ONS show the UK economy unexpectedly shrank in the three months to October, falling by 0.1%.

All of this will be keenly reviewed by MPC, who will then decide on where to set interest rates. A stagnant economy, rising unemployment and slowing inflation all suggest a base rate cut is on the way, despite inflation still running ahead of the BoE’s 2% target.

Follow our preview and reaction coverage of the MPC’s decision in this live report.

When is the MPC’s interest rates decision announced?

The MPC will confirm its UK interest rate decision at midday (12pm) tomorrow (18 December).

Stay with us for live reaction to the decision and what it may mean for your finances.

Why does the Bank of England review interest rates?

The Bank of England (BoE) reviews its base rate, eight times a year, as a lever to control inflation but also to stimulate growth in the UK economy.

The government sets an inflation target of 2% for the bank to meet. This is seen as a healthy rate of price rises for an economy.

The theory is that increasing interest rates encourages people to save money and not spend it, which in turn slows inflation.

Conversely, lowering interest rates reduces the cost of borrowing and can encourage people to spend their money rather than save it, which can stimulate growth in the economy.

What is the Monetary Policy Committee expected to announce?

All the signs point to a base rate cut tomorrow. In a research note published last week, one of the ‘big four’ banks HSBC said it expects a cut by 25 basis points to 3.75%.

This, HSBC said, was in line with market expectations, which is pricing in a 93% chance of a cut.

With labour market data showing unemployment on the rise and inflation data from today (17 December) showing price rises have slowed, this suggests a base rate cut is even more likely.

Alice Haine, personal finance analyst at online investment platform Bestinvest by Evelyn Partners, said: “The headline rate of inflation plunged to 3.2% in the 12 months to November, coming in lower than expected, raising the likelihood that the Bank of England will press ahead with a sixth interest rate cut tomorrow and deliver some much-needed respite for Budget-battered Britons ahead of Christmas.”

The Bank of England base rate over time

The base rate has gradually fallen from a high of 5.25% in 2024 – it has been cut five times since then and currently sits at 4%.

The base rate started climbing in December 2021, from 0.1%, as the Bank of England looked to cool runaway inflation that soared in part due to a rise in global demand for goods and higher energy prices.

What is the Monetary Policy Committee?

The Monetary Policy Committee (MPC) is a committee of nine members working for the Bank of England.

The committee is made up of one governor, currently Andrew Bailey, three deputy governors, a chief economist and four external members appointed directly by the chancellor, currently Rachel Reeves.

A representative from the Treasury also sits in on MPC meetings, but isn’t allowed to vote.

A decision on whether the base rate goes up, down, or stays the same, is based on a majority voting system. For example, at the last MPC meeting, five members voted to hold base rate at 4% while four voted to reduce it by 0.25 percentage points to 3.75%, so base rate stayed at 4%.

Why has inflation slowed to 3.2%?

The latest data from the Office for National Statistics (ONS) reveals the Consumer Price Index measure of inflation slowed to 3.2% in the 12 months to November, down from 3.6% in the 12 months to October.

According to last month’s Monetary Policy Committee report, the Bank of England expected inflation to fall to a higher 3.4%. So what is behind the bigger-than-expected fall?

The ONS said lower food prices were the main driver of the fall, with prices rising less quickly on cakes, biscuits and breakfast cereals. Tobacco prices and women’s clothing prices also helped pull the CPI rate down, the ONS said.

What dates will the Monetary Policy Committee make base rate announcements in 2026?

The Monetary Policy Committee will make eight announcements next year following base rate reviews.

These are the dates it will make announcements in 2026:

• 5 February
• 19 March
• 30 April
• 18 June
• 30 July
• 17 September
• 5 November
• 17 December

Monetary Policy Committee 'poised to cut rates'

The Monetary Policy Committee (MPC) is “poised to deliver an early Christmas present to markets in the form of another interest rate cut on Thursday”, said Matthew Ryan, head of market strategy at financial services firm Ebury.

Today’s larger-than-expected fall in CPI inflation will encourage the doves on the committee, who have previously pushed for cuts in order to support the UK’s faltering economy. But the vote of Bank of England governor Andrew Bailey could be decisive.

“On balance, we think that governor Bailey will side with the doves, but with the rest of the committee seemingly entrenched in their views, he may be the only official to change their vote from the previous meeting,” said Ryan.

Thanks for following our rolling preview of tomorrow's UK interest rates decision. We're finishing here for today, but join us again tomorrow morning for more preview analysis as well as live coverage of the decision and reaction from midday.

Good morning and welcome back to our live blog as we await the announcement of the Monetary Policy Committee’s base rate decision. We'll bring you live reaction and analysis following the announcement at midday.

How do you think the Monetary Policy Committee will vote on interest rates?

Where is inflation heading?

The latest Consumer Price Index (CPI) measure of inflation showed prices rose by 3.2% in the 12 months to November, according to the Office for National Statistics (ONS). But where will prices go next?

According to the Monetary Policy Committee’s latest Monetary Policy report, the CPI measure peaked at 3.8% this year.

It predicts it will be at 3.2% in March 2026, slowing to 2.5% at the end of next year, then reaching the 2% target by the last quarter of 2027.

Financial expert predicts 5-4 vote split

The last MPC meeting ended in a 5-4 vote split in favour of holding rates at 4%. That effectively meant that Bank of England governor Andrew Bailey – viewed as one of the centrists among the MPC panel – had the deciding vote.

Matthew Ryan, head of market strategy at financial services firm Ebury, expects that today’s meeting will see the same vote split, but that Bailey will opt to side with the doves on the committee.

“The November meeting minutes suggested that he was very close to doing just that last time out,” says Ryan. “The real question is whether any of the hawks follow suit.”

In a monetary policy context a hawk is someone who prioritises controlling inflation with tight monetary policy, as opposed to a dove who prioritises economic growth with looser policy.

Ryan doesn’t expect any of the MPC’s hawks to follow suit, given that most have expressed hawkish views in recent comments.

“Chief economist [Huw] Pill could make it a 6-3 vote, but he has also voiced a preference for a slow removal of policy restriction during his latest remarks, so he may again opt for no change,” said Ryan.

How closely have you been following the macroeconomic news this week?

BREAKING: As widely expected, the MPC has voted to lower interest rates, from 4% to 3.75%.

How did the Monetary Policy Committee vote?

The Bank of England’s (BoE) Monetary Policy Committee voted 5-4 to cut interest rates.

Andrew Bailey, governor of the BoE, said bank rate is expected to fall gradually in the future, depending on pay growth and services inflation continuing to ease.

Reeves responds to interest rates cut

Chancellor of the exchequer Rachel Reeves has responded to the news that the MPC has cut UK interest rates to 3.75%.

“This is the sixth interest rate cut since the election - that's the fastest pace of cuts in 17 years, good news for families with mortgages and businesses with loans.

"But I know there's more to do to help families with the cost of living. That's why at the Budget we froze rail fares and prescription charges, and will be cutting £150 off the average energy bill next year.”

Reduction in interest rates 'not a signal that borrowing costs are about to fall sharply'

Holly Tomlinson, financial planner at wealth management firm Quilter, said while today's interest rate cut showed there is growing confidence inflationary pressures are easing, it doesn't mean borrowing costs "are about to fall sharply across the board".

"With inflation still above target and policymakers keen to avoid reigniting price pressures, this move is best seen as a cautious adjustment rather than a decisive shift towards looser monetary policy, particularly at a time when household finances remain under strain from years of higher prices and frozen tax thresholds," Tomlinson added.

Monetary Policy Committee still committed to gradual cuts

The rate cut was viewed as a near-certainty by the markets, but with a 5-4 vote split it is clear that the MPC itself didn’t view the decision as a given.

“The decision to cut rates to 3.75% reflects a mixed economic picture, with UK growth relatively flat over the second half of this year while the latest inflation data came in softer than expected,” said Brad Holland, director of investment strategy at J.P. Morgan Personal Investing.

Holland highlighted that “the cooling across the UK economy over recent months has been a cause for concern for many in the market”.

Despite these concerns, four members – Megan Greene, Clare Lombardelli, Catherine L Mann and Huw Pill – viewed the risk of above-target inflation as greater than the threats to the economy.

“For now, it is clear to onlookers that the Bank of England continues to be focused on a ‘gradual’ approach to the rate-cutting cycle,” said Holland. “This may disappoint those who hope that faster rate cuts will spur economic growth and reduce borrowing costs, but with uncertainty still high, policymakers remain cautious.”

Bailey: Disinflation is established

Governor of the Bank of England Andrew Bailey was the swing voter across the MPC’s last two meetings, switching from a hold in November to a cut today and taking the MPC’s decision with him.

“Data news since our latest meeting suggests that disinflation is now more established. CPI inflation has fallen from its recent peak and upside risks have eased,” Bailey said in his comments. “Measures in the Budget should reduce inflation further in the near term. The key question for me now is the extent to which inflation settles at the 2% target in an enduring way.”

Bailey also highlighted the dilemma that the MPC faces: weakness in recent labour market data indicates a faltering economy, but “on the other hand, inflation expectations have not yet shifted downward sufficiently following the past few years of persistent above-target inflation”.

What does an interest rate cut mean for my pension?

Interest rate changes can have a big impact on retirees' income, for better or worse.

Adam Cole, retirement specialist at Quilter, said: “An interest rate cut can have very different effects across the pensions landscape, and the impact will depend largely on the type of pension someone holds and what they are planning to do with it.”

Impact on defined benefit pensions

If you have a defined benefit pension, lower interest rates could be good news. This is because they tend to push up transfer values – the amount of lump sum you could get instead of receiving a guaranteed, regular income.

But higher transfer values are not automatically a green light to transfer.

“Giving up a guaranteed, inflation-linked income for life remains a significant step, and one that should only ever be considered with specialist advice,” Cole cautioned.

Impact on defined contribution pensions

If you have a defined contribution pension – like the majority of people – the impact of a base rate cut depends on how it is invested.

Rate cuts tend to be good for equities, so if your pension is heavily invested in shares it could get a boost. But they also tend to push bond yields lower, which can affect the long-term income potential of lower-risk assets.

“This highlights the importance of asset allocation and not viewing pensions purely through the lens of short-term interest rate moves”, Cole said.

Impact of an interest rate cut on annuities

Annuity pricing remains closely linked to gilt yields, meaning any sustained move lower in interest rates would be expected to put downward pressure on the income available to new annuity buyers.

Yet ahead of the base rate cut, gilt yields remained stubbornly high. As a result, annuity rates remain among the most competitive seen in the past decade.

For example, at the start of this year, a Canada Life benchmark lifetime annuity purchased with £100,000 would have provided an annual income of around £6,800 for a healthy 65-year-old.

Yesterday, improved rates mean the same individual could secure approximately £7,300 per year – an increase that amounts to nearly £9,500 in additional income over a 20-year retirement, by Canada Life’s calculations.

Could falling interest rates help boost UK stocks?

The FTSE 100 is set for its best year since 2013, and looks likely to deliver better returns through 2025 than the S&P 500.

But the large-cap index generates most of its revenue from overseas. Small- and mid-cap UK stocks haven’t had quite as much joy so far this year, with the FTSE 250 returning around 10% this year.

If Bank of England governor Andrew Bailey is correct in his view that inflationary pressures are coming under control, then falling interest rates could be good news for more domestically-focused UK stocks.

“UK household balance sheets are healthy, and savings rates elevated,” said Alex Wright, portfolio manager of Fidelity Special Values. “With inflation easing and interest rates likely to follow, improving confidence could support consumption.”

Read more in senior writer Dan McEvoy's article on the prospects for UK stocks in 2026 here.

Interest rates on savings set to slip

The base rate cut is good news for borrowers but a blow for savers. Interest rates on savings accounts are likely to slip further, so savers looking to make their cash work harder may want to act now and secure the best savings rates on the market.

If you’re willing to lock your savings away, you might want to consider the top fixed rate savings accounts. At the time of writing, the top one-year fixed savings account is the One Year Fixed Term Deposit from Al Rayan Bank Meteor Savings, which pays an expected rate of 4.55%.

The latest inflation reading came in at 3.2%, so make sure your savings are earning more than this, to prevent your money from being eroded by inflation. Don’t miss our best inflation-beating savings accounts guide.

When deciding where to put your money, consider whether you will need to pay tax on the savings interest. There are various allowances so you can earn some interest before you have to pay tax on it – such as the personal allowance, if you haven't already used that on other income, and the starting rate for savings. You won't qualify for the latter if your other income is 17,570 or more.

Basic and higher rate taxpayers get a personal savings allowance. This means you can earn £1,000 in savings interest tax-free if you're a basic rate taxpayer, or £500 if you're in the higher tax band. Tax on savings interest is currently applied at your marginal tax rate – eg 20% for basic rate taxpayers. However, the tax rate for savings income will rise by two percentage points from April 2027.

You can shield your savings from the taxman by putting it in a cash ISA. You can put up to £20,000 into ISAs each tax year – although under 65s will be limited to putting no more than £12,000 into cash ISAs from 6 April 2027.

Read more: How to shield savings from tax if you’ve used up your ISA allowance

It's recommended that you have some cash in easy to access savings, in case of an emergency. The amount will depend on your age and personal circumstances but, for working people, the general rule of thumb is to have enough to cover three to six months of essential spending. Once you have an emergency savings pot, you might want to consider investing some of your savings.

What do falling interest rates mean for mortgages?

A fall in base rate is usually mirrored in mortgage rates, as base rate is the rate charged by the Bank of England (BoE) to smaller banks and building societies to borrow money. It is also the rate of interest the BoE pays to commercial banks, building societies and financial institutions that hold money with it.

When you will see a change in your mortgage rate is dependent on the type you’ve taken out.

Tracker mortgages are directly pegged to the base rate so any change is likely to happen quickest.

Those on standard variable rates may be the next to see a change. That said, you might not see much change as lenders are not obliged to pass on any base rate cut to those with an SVR.

Following the announcement of today's base rate cut, Nationwide Building Society said it will lower the rate on its Standard Mortgage Rate (SMR), its SVR-equivalent, from 6.74% to 6.49% on 1 January.

Those on a fixed-rate mortgage won’t see a change until their deal comes to an end.

David Hollingworth, associate director at mortgage broker L&C Mortgages, said it could be worth opting for a tracker mortgage over the longer term, with interest rates forecast to fall further in 2026.

“Tracker rates have been gradually closing the gap on fixed rate options but are still behind the best of the fixes. However, with more base rate cuts expected next year we will potentially see more borrowers wondering if following rates down could make for a better option in the longer run,” Hollingworth said.

Beat low rates on savings

While interest rate cuts are great for borrowers, for savers it means your money may have to work harder to beat inflation.

While there are some savings accounts that beat inflation (for now), over the long term, you face the risk of inflation eroding the value of your cash – this basically means your money will be worth less in years to come.

To keep up, investing is the key. You will have heard a lot recently about investing. As interest rates on savings come down, and they will, now is the time to turn to investing to really grow your savings and build financial resilience against future rate cuts, which are expected in 2026.

If you put £1,000 into savings today and then paid in £100 a month over 10 years, you will have £13,000 and it would be worth £15,358 with interest at 3% a year – that’s £2,358 interest.

Invest the same, you could end up with £20,287, earning £7,287 interest, with an estimated 8% annual return (it could be higher but also lower), Hargreaves Lansdown's calculator shows.

Better yet, stick it in stocks and shares ISA to shield it from the taxman.

See our guide on how to start investing for more.

Deutsche Bank: three things today’s UK interest rates decision tells us

Sanjay Raja, chief UK economist at Deutsche Bank, draws three key takeaways from today’s MPC meeting.

“First, as has been a long-standing theme for the BoE, divisions within the MPC remain. The December decision came with another split vote with five members voting for a quarter-point rate cut, and four opting to hold Bank Rate at 4%,” Raja said.

“Second, Bank Rate is inching its way towards a more 'neutral' policy setting. And the scope for more rate cuts is limited, with the Bank sending its more explicit message yet on the path for policy: ‘judgements around further policy easing will become a closer call’.

“Third, the trade-off between a deteriorating labour market and falling inflation will complicate the MPC's path ahead. Despite a subtle push to shift away from a quarterly pace of rate cuts, many on the committee continue to put more weight on downside risks to activity (and the labour market).”

When is the MPC’s next base rate announcement?

The MPC’s next base rate decision will be confirmed on 5 February – the first announcement of eight in 2026.

And with that, we’re leaving you for today. Thanks for following our live coverage, but keep a watch on the MoneyWeek site for future updates on what today’s decision means for your finances.

UK inflation: Summary

• The Office for National Statistics (ONS) releases the latest UK inflation data today (17 December).
• The Consumer Prices Index (CPI) rose 3.2% in the 12 months to November, below the Bank of England's expected 3.4%. Some analysts had forecast a reading as high as 3.6%.
• CPI fell by 0.2% between October and November.
• A slowdown in food, alcohol and tobacco prices was the biggest disinflationary driver.
• Last month, data showed that CPI rose 3.6% in the 12 months to October, down from 3.8% in the previous three months.
• The UK’s current inflationary cycle is expected to have already peaked for 2025.
• The Office for Budget Responsibility (OBR) expects inflation to fall to 2.5% in 2026, and to the Bank of England’s target 2% rate the following year..

| What is inflation? | CPI versus RPI inflation | Upcoming CPI release dates |

Good afternoon, and welcome to our live coverage ahead of tomorrow’s UK inflation data release.

The final week before Christmas is a big one for UK macroeconomic news. Today saw the release of labour market figures showing that UK unemployment rose to 5.1% in the three months to October, while tomorrow we have the ONS’s inflation data release.

Both those releases will be front and centre when the Bank of England’s Monetary Policy Committee (MPC) meets on Thursday. A weakening economy will strengthen calls for an interest rate cut, but tomorrow’s inflation data could pose a head-scratcher for the committee if the CPI figure remains elevated.

Follow our preview and reaction coverage of the latest UK inflation data release in this live report. MoneyWeek will also be reporting on the MPC meeting later in the week.

When is UK inflation data announced?

The ONS will release the latest UK inflation data tomorrow (17 December) at 7am.

We’ll bring you live coverage of the release as it happens as well as reaction and analysis afterwards.

What is CPI?

The Consumer Prices Index (CPI) is the headline measure of inflation that is used by the ONS and policymakers to measure the pace of price increases.

CPI is calculated based on annual changes in prices of a basket of goods that reflect broad consumption patterns in the economy. The MPC targets an annual rate of CPI inflation of 2%, which is viewed by most economists as a healthy level of inflation.

While too much inflation is bad, as it can make goods unaffordable for much of the population, too little is also viewed as economically unhealthy. If inflation turns negative (so prices are falling across the economy), it is called deflation, and it can be very damaging economically.

Most countries use CPI as the headline measure of inflation, but there are other means of measuring it.

For example, the Retail Prices Index (RPI) includes measures that are related to home ownership.

We explain the difference between CPI versus RPI inflation in a separate piece.

What are the expectations for UK inflation?

According to last month’s Monetary Policy Committee report, the Bank of England expects inflation to have fallen by 0.2 percentage points to 3.4% in the 12 months to November.

Not all economists agree. Andrew Goodwin, chief UK economist at economic advisory firm Oxford Economics, predicts an inflation read of 3.6%. Robert Wood, chief UK economist at research firm Pantheon Macroeconomics, expects the read to come in at 3.5%.

“We expect year-over-year airfares inflation to surge to 12.3% in November from 0.9% in October, as a large fall in ticket prices last November drops out of the annual comparison,” said Wood.

Bank of England projections see CPI inflation averaging 3.5% in the fourth quarter of 2025, before falling to 3.1% in the first quarter of 2026.

Charting UK inflation

UK inflation was trending downwards following a peak in October 2022.

That trend has reversed this year, largely thanks to the impact of last year’s Autumn Budget which contained several inflationary measures like an increase to the minimum wage.

September was expected to mark the high point of the latest bout of inflation, at 4%. As it happened, the month marked the end of a three month plateau at 3.8%, before inflation fell to 3.6% in October.

Will we see another dip when the ONS figures are released tomorrow, or is UK inflation set to plateau again?

Inflation data unlikely to comfort households at Christmas

Expectations for tomorrow’s inflation read range between 3.4-3.6%. But households are likely still feeling the squeeze, according to Tamsin Powell, consumer finance expert at Creditspring.

“While prices may not be rising as quickly as they have done previously, they are still rising faster than wages for many,” she said. “The prolonged period at this level continues to squeeze already stretched budgets.”

Powell added that the timing of the final read of the year is “particularly difficult as families head into the festive period, when spending on food, travel and socialising typically rises”.

However, the longer term picture is more upbeat.

“Inflation is widely expected to move onto a clearer downward path in 2026, supported by easing energy costs and continued government measures such as the fuel duty freeze,” said Powell.

Thanks for following live coverage ahead of tomorrow's UK inflation data. That concludes coverage for today, but join us first thing tomorrow morning for live coverage of the release as it happens.

Good morning, and welcome back to live coverage of today's UK inflation data release. We're just a few minutes away from the ONS announcing November's inflation figures. Stay with us for live coverage and rolling reaction and analysis.

BREAKING: UK INFLATION FELL TO 3.2% IN NOVEMBER

Food and alcohol bring UK inflation below expectations

A slowdown in alcohol and food inflation seems to have been the main driver behind this unexpectedly low inflation reading.

More analysis and reaction to follow.

UK Inflation at its lowest level since March

That reading of 3.2% is the lowest CPI reading since March (2.6%), which preceded a jump to 3.5% in April as some of the more inflationary measures from chancellor Rachel Reeves’s first Autumn Budget took effect.

Lower food, alcohol and tobacco inflation seem to have driven the drop.

“Lower food prices, which traditionally rise at this time of the year, were the main driver of the fall with decreases seen, particularly for cakes, biscuits, and breakfast cereals,” said Grant Fitzner, chief economist at the ONS.

“Tobacco prices also helped pull the rate down, with prices easing slightly this month after a large rise a year ago. The fall in the price of women’s clothing was another downward driver.”

While the cost of raw materials for businesses rose, there was a slowdown in the increase of the cost of goods leaving factories.

Services remain the main driver of inflation

Looking more closely at today’s UK inflation figures, services inflation, which has remained sticky throughout the current inflationary cycle, is still the biggest driver of inflation.

In the 12 months to November, services CPI rose 4.4%. Goods CPI ran at 2.1% in that period – only fractionally above the Bank of England’s target rate for all CPI.

On a monthly basis, CPI fell by 0.2% in November.

Reeves responds to inflation report

Chancellor Rachel Reeves has responded to this morning’s inflation report, saying that families across the country that are concerned about their bills will welcome the fall.

“Getting bills down is my top priority. That is why I froze rail fares and prescription fees and cut £150 off average energy bills at the Budget this year,” said Reeves. “The Bank of England agree this will help cut prices and expect inflation to fall faster next year as a result.”

Lower-than-expected inflation increases the chance of an interest rate cut

The Bank of England’s Monetary Policy Committee (MPC) meets tomorrow, and today’s unexpectedly low inflation read combined with recent weak economic data ramps up the likelihood that the Bank will deliver an interest rate cut at its final meeting of the year.

“Today’s news is a bright spot for the Bank of England, government and consumers alike,” said Isaac Stell, investment manager at Wealth Club – though he cautioned that there is still a way to go before headline inflation rates return to the Bank’s 2% target.

“Looking ahead, barring any surprise change of heart, markets expect the Bank of England to press ahead with one final cut for the year to the base rate,” said Scott Gardner, investment strategist at J.P. Morgan Personal Investing.

Beyond CPI: more November inflation metrics

As we have mentioned earlier, CPI – while the headline rate that is most closely-watched by policymakers – is not the only measure of inflation.

Nor is it the most comprehensive: that mantle goes to the Consumer Prices Index including owner occupiers' housing costs (CPIH). UK CPIH rose 3.5% in the 12 months to November, down from 3.8% in the 12 months to October.

Core CPI and core CPIH are versions of each of these indices that remove more volatile categories such as food, alcohol, energy and tobacco.

Core CPI rose 3.2% in the 12 months to November, down from 3.4% the previous month, while core CPIH rose by 3.5% – down from 3.7% in October.

^{Source: Office for National Statistics}

Food and drink dragged UK inflation downwards

Here’s a closer look at how the different categories impacted CPI in the 12 months to November:

Food and non-alcoholic beverages as well as alcohol and tobacco were the two most disinflationary categories, both taking 0.07% off annual CPI inflation.

Clothing and footwear followed with an annual impact of -0.06%.

Communication added 0.01% to annual CPI inflation.

Recap: UK CPI inflation fell to 3.2% in November

Here’s a recap on the UK inflation headlines today:

• Headline UK inflation as measured CPI rose by 3.2% in the 12 months to November.
• The Bank of England had forecast a rise of 3.4%, while some economists expected an inflation rate of 3.6%.
• Food and non-alcoholic beverages as well as alcohol and tobacco were the two most disinflationary categories.
• CPI fell by 0.2% on a monthly basis.
• CPIH rose 3.5% in the 12 months to November, down from 3.8% in the 12 months to October. Core CPI rose 3.2%, down from 3.4%, while core CPIH rose 3.5%, down from 3.7%.

Services inflation still a concern

Looking at goods alone, CPI ran barely above the Bank of England’s target rate in the 12 months to November.

It is the services sector that is keeping UK inflation elevated.

“Service sector inflation will certainly be an area of concern, with the cost of eating and staying out elevated as businesses attempt to deal with last year’s Budget measures which increased labour costs,” said Danni Hewson, head of financial analysis at AJ Bell.

Hewson cautions that falling inflation doesn’t mean the cost of living is getting cheaper – inflation measures the pace of price increases, and 3.2% is still well above the target level.

“But the bigger than expected fall in headline CPI is good news and will help boost people’s spending power and confidence,” she added. “With so much of the UK economy reliant on household spend, it could also signal better news for the UK’s flatlining growth.”

UK inflation is trending down

November’s headline inflation figure, with CPI rising 3.2% annually, is the lowest the measure has stood since March this year.

It continues a welcome trend of falling inflation, with the period from July to September when CPI rose 3.8% for three consecutive months marking the peak of the current inflationary cycle.

Based on data from the MPC’s last meeting in November, Bank of England staff expect UK inflation to average 3.5% in Q4 before falling to 3.1% in Q1 2026 and 2.9% in Q2.

Moneyfacts: savings are being hit by inflation

We’ve had a slightly unusual combination of falling interest rates alongside elevated inflation this year.

That’s bad news for savers, who see their returns squeezed in nominal terms by falling rates, and in real terms by inflation eroding their buying power.

“This year inflation has averaged 4.01% and the Moneyfacts Average Savings Rate at 3.50%, meaning cash savings have failed to keep pace,” said Caitlyn Eastell, spokesperson at Moneyfacts.

“For someone with £10,000, this equates to being around £50 worse off in real terms.”

Eastell recommends that savers shop around for the best deals to ensure that their money is working as hard as possible for them.

Alternatively, savers could consider starting to invest some of their money in a stocks and shares ISA. Historically, stock market trackers have tended to outperform cash savings and generate inflation-beating returns.

Research from Fidelity International found that £20,000 saved into a cash ISA on 6 April 2017 would have been worth £23,549 by October 2025. But to keep up with inflation over that period, it would have needed to grow to £27,000.

The same amount invested into a global tracker fund in a stocks and shares ISA would have grown to £50,700, according to the analysis.

Are we nearing an end to the inflationary cycle?

Aside from September 2024, when annual CPI inflation briefly dipped to 1.7%, inflation has been running above the Bank of England’s 2% target rate ever since July 2021.

But with inflation having fallen by more than expected in the year to November, is the end of the current inflationary cycle now in sight?

“After a prolonged period of elevated inflation, the latest figures suggest the economy is entering the final stretch towards more normal levels,” said Charlotte Kennedy, chartered financial planner at Rathbones. “Measures announced at the Budget – such as freezing rail fares until 2027, cutting fuel duty, and reducing energy bill costs – are expected to shave around 0.5 percentage points off headline inflation by the middle of next year.”

However, Kennedy cautioned that we are not out of the woods yet.

“It remains important to recognise that each of us experiences a personal inflation rate based on our individual spending habits. Making the necessary adjustments is key to maintaining financial resilience - especially during the festive period, which is often characterised by excessive spending.”

What the latest UK inflation data means for interest rates

A 25 basis point cut to interest rates had been widely expected for the Monetary Policy Committee’s (MPC) meeting tomorrow, even before the surprisingly large drop in CPI inflation.

The inflation surprise “de facto locks in” the cut, according to Kallum Pickering, chief economist at investment bank Peel Hunt.

Pickering also observed that the likelihood of a successive rate cut in the first quarter of next year has increased off the back of today’s data.

“The danger now is that the BoE keeps its policy too tight for too long,” he said. “No growth since summer, a rapid cooling of the labour market, elevated household saving and a sluggish housing market are all obvious signs of tight money.

“These data are hard to square with the lingering hawkishness at the BoE,” he added.

Tell us your thoughts – where is UK inflation going?

Today’s UK inflation read marked a surprisingly large drop in UK inflation. Where do you think inflation will go between now and the end of next year?

UK inflation recap

As a reminder, the headline CPI inflation figure fell from 3.6% in the year to October to 3.2% in the year to November. That’s a much steeper drop than had been expected, though it still leaves UK inflation well above the Bank of England’s target 2% rate.

The big question now is whether this will prompt the MPC to cut interest rates when it meets tomorrow.

We're going to end our inflation coverage here in the meantime. Thank you for following, and visit our interest rates report for more analysis of how today's inflation data could impact UK interest rates.

If you’re a high earner, but not rich yet (also known as a HENRY) then the Autumn Budget which took place three weeks ago could mean your purchasing power may be significantly reduced by 2029 by thousands.

After all the kite-flying ahead of chancellor Rachel Reeves’s Autumn Budget announcement (not to mention the Office for Budget Responsibility’s (OBR) report being leaked early on the day), the amount of tax hikes announced was not a surprise. But that is small comfort for the high earners that could be left thousands of pounds worse-off by the end of the decade.

Analysis from investment platform IG suggests HENRY households earning around £100,000 could see their annual real purchasing power reduced by as much as £15,000 by 2029 thanks to measures in the Budget.

“While the chancellor met her fiscal rules and avoided increases to income tax or national insurance, the combination of policy measures and frozen thresholds will have a disproportionately large effect on HENRY households,” said Chris Beauchamp, chief market analyst at IG.

IG’s analysis found that, when factoring in household inflation and fiscal drag resulting from frozen tax thresholds over the next three years, ninth-decile earners (with an average household income of £65,700) face an average reduction in real purchasing power of £8,935 by 2029. For top-decile earners (average income of £103,700), the reduction is £15,658.

How will the Budget impact high earners?

There are a number of measures that will dent your finances. From frozen tax thresholds, council tax hikes to IHT changes - these are the ones HENRYs should look out for.

Frozen tax thresholds

Reeves extended the freeze on tax thresholds until 2031. This is widely regarded as a ‘stealth tax’ because, assuming incomes rise roughly in line with inflation, more people will be dragged into higher tax brackets without being significantly wealthier in real terms – a process known as ‘fiscal drag’.

“At that point, it’s not just more income tax you have to worry about, but potentially higher rates on everything from dividend tax to capital gains tax, and a shrinking personal allowance,” says Sarah Coles, head of personal finance at Hargreaves Lansdown.

Investment taxes

Despite the chancellor’s claims to be building an investment culture in the UK, Reeves also announced higher taxes on investments. This includes higher rates of tax on income from dividends, as well as a cut to tax relief on new shares in venture capital trusts from April.

Higher inheritance tax

Inheritance tax (IHT) bands have also been frozen until 2031, meaning the nil rate band for estates and residences will remain at £325,000 and £175,000 respectively until then. The annual gift allowance has also been capped at £3,000. This essentially means more families will fall into the IHT trap.

“IHT used to be seen as a wealthy person’s tax, but a mix of booming house prices and threshold freezes mean this may not be the case for much longer,” says Coles.

Council tax hikes

Council taxes are also going up in April; the government has previously said that councils will be allowed to hike council tax by 5% without requiring a referendum.

Some parts of the UK face a council tax hike of as much as £500 by 2029/30.

There will also be a new ‘mansion tax’, collected via council tax, on homes worth £2m or more, from April 2028.

Higher “sin taxes”

The government has increased taxes on a range of undesirable behaviours. The one that will likely impact the most households is the withdrawal of 5p fuel duty relief, which will be gradually unwound between August 2026 and March 2027.

Alcohol duty will rise by RPI inflation from 1 February. Tobacco duty will increase annually by RPI + two percentage points (with immediate effect). There will also be a one-off increase of £2.20 per 100 cigarettes or 50g of tobacco, coinciding with a similar levy on vaping products, of £2.20 per 10ml of vaping liquid, in order to ensure that there is still an incentive for smokers to switch to vaping.

How to reduce your Budget tax exposure

While the Budget measures will cause a hit on your income, there are things you can do to cushion the blow and maintain your household spending power.

First, make the most of your ISA allowance – which still stands at £20,000 for cash ISAs until the new limit applies from April 2027. This will protect you from increases to capital gains tax, as well as taxes on your income from interest on cash.

If your money is not in an ISA and you are a basic tax rate payer, you will pay tax on any interest above £1,000 that you earn, and anything over £500 if you are a higher rate tax payer. Keeping your money in an ISA shields your returns from the tax man, so make the most of the cash ISA allowance while you can.

Dividends from investments held in a stocks and shares ISA are also exempt from dividend tax, so you will avoid the higher tax rates applying to this form of income.

If you’re married or in a civil partnership, you can take advantage of increased personal allowances for tax purposes. “If one spouse is a non-taxpayer and the other is a basic rate taxpayer, the marriage allowance lets the non-taxpayer give £1,260 of their personal allowance to their spouse in the current tax year,” explains Coles

Spouses maxing out their ISA allowance may also be able to pass some of their holdings to their partner in order to reduce their tax bill. Assets that produce an income “can be passed between spouses (or civil partners) without triggering a tax bill”, says Coles. “They can therefore be shared between a couple, so that both can take advantage of their ISA allowances, and they can both take an income up to the threshold.”

Pension contributions – up to £60,000 annually – also qualify for tax relief at your highest marginal rate, while contributions to self-invested personal pensions (Sipps) also offer tax relief on the first £3,600 per year.

“If you can afford to put more money away for the long term, it’s a great way to cut your tax bill – as well as securing the income you need in retirement,” says Coles.

Salary sacrifice is another approach that can reduce your tax bill, and the time to use it is now: from 2029, only the first £2,000 will be free of employer and employee National Insurance. “However, there’s still time to take advantage before this change,” says Coles.

The UK renewable energy sector cannot catch a break. At the end of October, the government launched a consultation on changing the Renewables Obligation Certificate (ROC) scheme that subsidises some renewable-energy production. At present, the subsidies are linked to inflation using the retail price index (RPI) measure, but they may now be switched to the consumer price index (CPI). RPI usually rises faster than CPI (the gap varies, but one percentage point is a rough rule of thumb), and so this would mean that subsidies rise more slowly in future.

The government has proposed two options for this. One is to switch to CPI in 2026. The other is backdate the change to 2002 (when ROCs were introduced) by freezing the current price until a new “shadow price” linked to CPI since 2002 catches up with today’s RPI-linked price, and thereafter increase with CPI. Neither are good, but the latter option is clearly worse. Hence shares in listed renewable energy investment funds (REIFs) slumped further, having already been battered by a series of setbacks and problems in recent years.

The changes would have no direct impact on new investments – the ROC schemes closed to most new applications in 2017. However, existing wind and solar farms have been promised subsidy payments until 2037 in some cases, so the changes will affect their earnings. More broadly, making retrospective changes undermines the assumptions on which existing investments have been made. That will erode investors’ confidence in committing future capital.

While the subsidies are ultimately paid by users as part of their energy bill, the change from indexing on RPI to using CPI is likely to mean a minimal reduction in the average household bill. At the same time, it will probably raise the cost of capital for future projects, making it ultimately self-defeating, argue infrastructure funds. Certainly, one has to feel that the government’s Clean Power 2030 (CP30) plan – which assumes £40 billion of private investment a year in green energy between now and 2030 – now seems wildly optimistic.

Losing patience with renewable energy funds

The direct impact of the change on listed REIFs will depend on which option is chosen (and on how much ROCs contribute to their income – typically 40%-50%). For many investors, this may feel like the final straw – yet more evidence that the sector is both unlucky and dysfunctional. While the government is clearly to blame for this particular shock, the way that the REIF sector has developed in recent years hasn’t encouraged investors to give it the benefit of the doubt. One can’t treat all REIFs as exactly the same and I’m going to focus largely on the solar funds here, but many of the problems apply more widely.

Bluefield Solar Income Fund (LSE: BSIF), Foresight Solar Fund (LSE: FSFL) and NextEnergy Solar Fund (LSE: NESF) put out statements saying that the impact on net asset value (NAV) would be around 2%, 1.6% and 2% respectively under option one and 10%, 10.2% and 9% under option two. This sounds manageable. However, we immediately get onto the question of how much investors trust these reported NAVs, which are based on fair value accounting and “mark to model” assumptions. The fact that most REIFs trade on 30%-40% discounts to NAV implies some scepticism about these valuations, while the fact that dividend yields are in the 10%-15% range suggests some concerns about their sustainability.

The original sin in the REIF model is that it was built around being able consistently to issue shares at premiums to NAV to fund new projects. REIFs were marketed as a growing income story in a low-yield world, with the added bonus of a green angle during the economic, social and governance (ESG) boom. Yet they were always paying out cash with one hand while taking it in with the other (hence NESF’s shares outstanding have doubled from 278 million 10 years ago to 555 million currently). This model only worked when the shares traded at a premium to NAV – now that they don’t, the REIFs no longer have access to cheap equity. Debt is no longer cheap either. It might make sense to cut dividends and reinvest the cash, but that would alienate investors who bought for income.

While this explains their growth problem, the opaqueness of returns explains why many investors are wary of them even as a limited-life income asset. In theory, the NAV represents the current value of future expected cash flows. The focus on this – and on paying steady dividends – makes it look as if REIFs have very simple, predictable economics. Reality is more complicated. Projected revenues depend on power price forecasts that come from third-party forecasters. When these change, so do NAVs. Meanwhile, actual performance has plenty of real-world complications.

For solar, there’s the amount of sun that falls on the panels. There’s whether it all gets used or whether grid outages means some gets wasted (FSFL had UK production 8.9% above budget in the first half, but would have been 13% higher without outages). On sunny summer days, there will be points when a surplus of solar power floods the system and sets the marginal price (at extremes the unsubsidised price can even go negative). Hence the “capture price” that solar farms get can sometimes be less the base load price (the price for steady, always-on power) – this summer, capture rates have frequently dropped to 80%. And if the grid physically can’t cope with the power being supplied, producers may be curtailed (turned off) by the system operator, meaning lost revenue.

Since the REIFs’ lenders and shareholders prioritise stability, the managers fix prices for much of their output in advance with power purchase agreements (PPAs). However, this means that they don’t capture much upside from spikes in spot prices (driven by higher gas prices, which set the marginal UK power price most of the time). All these factors come together in a bewildering series of assumptions. To take just one example, NESF’s short-term power price assumptions have fallen 56% from £139 per megawatt hour (MWh) in September 2022 to £61/MWh in September 2025. Longer-term power price assumption has risen 22% over the same three-year period. Yet its 20-year average price forecast has halved since it floated in 2014, pointing to long-term downward pressure.

Can renewable energy funds win back nervous investors?

What is the result of trying to distil such complexity into a single NAV that constantly changes? It is doubt about whether management are trying to mask poor economics with financial engineering, unconsolidated statements, fair value accounting and unverified assumptions. The accounting might technically be correct, but it is opaque and hard to compare between funds. Each time forecasts prove too optimistic and NAVs get downgraded, scepticism grows. This is why the REIFs now trade at huge discounts to NAV. (Policy risk – as demonstrated by the government’s proposed ROC change – may be another factor.)

Most of the REIFs seem to have little idea of how to get investors to trust them. They have tried to address the discount to NAV with share buyback programmes, but these have been too insignificant to counter the wave of selling. What’s more, buybacks often increase leverage: in May this year, NESF had to pause its buyback as leverage would have increased beyond its 50% debt-to-gross asset value policy limit. Rising debt is exactly what nervous investors don’t want to see.

Many have tried to sell assets, which would raise cash to pay down debt and fund buybacks while also validating NAV through real-world selling prices. This process has been slow, suggesting it may be hard to achieve prices respectably close to NAV. For example, in April 2023 NESF said it would sell 246MW of UK subsidy-free solar capacity across five separate projects. At present, there are still two project with 100MW yet to be sold. Last year, FSFL said it would sell its Australian portfolio (170MW across four sites), but the process has now been paused. A small number of bids for the portfolio were received, but none were deemed deliverable. In March this year, it earmarked a further 75MW for sale, with no results so far.

More recently, Bluefield proposed merging with its manager to focus on developing a 1.4GW pipeline of projects. However, that model implied a cut to the dividend and was quickly rejected by shareholders (if they were sceptical about the potential returns on capital, it is not surprising given the sector’s record). The fund was forced to ditch this and put itself up for sale. This has not steadied the decline in the share price, which has fallen to new lows below 70p, with a yield of 13% and a discount to NAV of 39%.

Until now, REIFs that have faced continuation votes have largely won them despite these woes – probably because investors are sceptical that they can sell their assets, pay back the debt and achieve a decent return for shareholders. This detente may be changing as investors get more anxious. The chairs of NESF, FSFL and BSIF have all stepped down in the past year and new brooms may be minded to sweep clean.

We could be reaching the point of maximum pessimism, as seems to have happened with battery funds. I have a position in NESF, bought on the basis that the dividend could well be cut, but that much of the bad news was already in the price with a yield in the mid-teens. Still, if the REIFs’ accounts clearly told us how much cash is being generated per pound invested per MW and whether it is declining, it would be much easier for investors to decide whether they still want to back these “sustainable” investments.

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It took a couple of months for the amount of damage it would do to become painfully clear. In her first Budget, chancellor Rachel Reeves pushed up the national insurance (NI) charges that companies have to pay on every person they employ. Over the following months, vacancies started to fall dramatically, and unemployment rose. Something similar is about to happen after Reeves’s most recent Budget. This time, it is the punishing rise in business rates that will crush the British economy.

After all the speculation, the Budget was a damp squib. The basic rates of income tax were not in fact increased for the first time since the 1970s, and there was no sign of a wealth tax – although the levy on “mansions” comes very close – or an exit tax on the entrepreneurs fleeing for Italy and Dubai. Instead, there was a big increase in welfare spending, paid for with lots of fiddly stealth taxes to raise the money needed to pay for it all. Now, however, the implications of the small print is starting to become clear – Reeves has hiked business rates on companies that are already struggling to make a profit in the UK.

With a series of reforms of the way that rates are calculated, and the way that various reliefs are set, plenty of horror stories are starting to emerge. According to UKHospitality, the average pub is expected to see a £1,400 increase in its rates bill over the next year, and that will be hitting a sector where businesses are already closing at a rate of eight a week.

Property tax consultancy Ryan calculates that music venues such as London’s O2 and Co-Op Live in Manchester face rises of up to £1.8 million in their annual property tax bills. British music studios face punishing increases of £20,000 a year or more.

Eurotunnel, which operates the Channel Tunnel, has said it may have to pull out of any further investment in the UK over fears that its rates bill could rise from £22 million a year to £65 million. The list goes on and on. Right across the UK, firms are facing punishing increases in the amount they have to pay in tax on their premises. It now looks as if many businesses will be facing rises in their rates bills of 50% or more over the coming year.

There are three problems with that. To start with, business rates have to be paid regardless of whether a company makes any money or not. There is “financial hardship relief”, but that is very hard to apply for and there are lots of conditions attached. In effect, it is just a huge fixed cost, much like rent, or staff or raw materials. At least corporation tax is only due on any surplus you manage to generate. A rise in the rates bill will mean that lots of companies, and small companies in particular, are no longer viable, and will have to close down simply because they can’t afford the extra tax.

Higher business rates will force companies to close

Next, they penalise a company for investing and expanding. It is already expensive for a shop to open a new store in the next town, or for a cafe to open up an extra outlet. There is rent to be settled in advance, and stock to be paid for. It might be a year or more before the owner starts to make even a modest profit. But extra business rates will make it even harder to break even. At the margin, it will stop companies from attempting to grow their business.

Finally, rates make it harder for physical businesses to compete against virtual ones. The latest round of reforms might have been designed to level the playing field, but have ended up simply imposing higher bills on traditional businesses. An online shop pays far lower rates than one on the high street, and a food-delivery app pays far less than a gastro pub in the same village. It punishes the businesses that are already having a very hard time staying afloat.

Rachel Reeves came into office promising to prioritise growth. But you can’t do that while at the same time piling more and more stealth taxes onto businesses. The lesson from the NI debacle was that extra employment costs for businesses simply meant they ended up hiring fewer people. Likewise, extra property costs will mean they close down branches and, in some cases, give up completely. The government is repeating exactly the same mistake of its first Budget.

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