What’s behind the UK’s spike in inflation?

Summary

Marketplace Morning Report: What’s Behind the UK’s Spike in Inflation? Hosted by Marketplace, February 19, 2025

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Introduction: A Surprising Surge in UK Inflation

In this episode of the Marketplace Morning Report, host Nick Qureshi delves into the unexpected rise in the United Kingdom's inflation rate. Jumping from 2.5% to 3%, this marks the highest inflation level in ten months, signaling potential economic pressures ahead. The report features insights from the BBC's Will Baines and explores broader economic implications both within the UK and internationally.

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Causes of the Inflation Spike

1. Policy Changes Affecting Private Schools At 01:16, Will Baines explains one of the primary drivers behind the inflation surge:

“One is a policy around changing the kind of tax relief that private schools... a lot of the fees at these schools went up. So that was a big outlier that drove the overall average up.”

The alteration in tax relief for fee-paying schools led to increased tuition costs, contributing significantly to the overall inflation figures.

2. Airline Pricing During the Holiday Season Continuing at 01:16, Baines identifies another factor:

“The airlines here in the UK normally would be discounting their prices and they didn't do that much this Christmas. So transport was another big driver of that headline figure.”

The lack of typical discounts from airlines during the Christmas season resulted in higher transportation costs, further elevating inflation rates.

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Implications for Interest Rates and Bank of England’s Policy

At 01:58, the discussion shifts to the potential impact on monetary policy:

“With energy bills going up a bit here in the UK too... it's a difficult conundrum for the Bank of England... market expectations that there's going to be far fewer interest rate cuts this year in the UK.”

Baines highlights the dilemma facing the Bank of England: typically, economic pressure might prompt interest rate cuts to stimulate borrowing and expansion. However, the current inflation trajectory and rising utility costs complicate this decision, leading to expectations of fewer rate reductions and possible delays in future adjustments.

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Broader Economic Headlines

1. EU Sanctions on Russia Nick Qureshi reports on the EU’s ongoing sanctions against Russia, noting the inclusion of a ban on Russian primary aluminium imports and the listing of 73 new Shadow fleet vessels. This moves toward the third anniversary of Russia's invasion of Ukraine and coincides with efforts led by former President Trump to negotiate peace.

2. Oil Prices on the Rise Concerns over potential supply disruptions in the US and Russian markets have pushed oil prices upward. Brent crude futures increased by half a percent, reaching just over $76 per barrel. This uptick reflects the market's anxiety over the stability of oil supplies amidst geopolitical tensions.

3. HSBC’s Cost-Saving Measures Banking giant HSBC is undertaking significant restructuring to save $1.8 billion by the end of next year. Under new leadership, the bank aims to boost profits while navigating a landscape marked by mixed interest rate policies and substantial geopolitical shifts.

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German Economy and the Mittelstand Crisis

The report also sheds light on Germany's economic challenges, particularly focusing on the Mittelstand—the backbone of the German economy comprising small and medium-sized, often family-owned, enterprises.

1. Overview of the Situation German voters are preparing for elections to form a new government after the collapse of the previous coalition over spending disagreements. The German economy, Europe's largest, experienced contraction last year, raising concerns about its future stability.

2. Insights from Mittelstand Leaders At 04:26, Fabien Benach, head of EVA Logics, shares his perspective:

“Some of the obstacles that we face is of course, regulation... it's about providing great economic conditions. The track record over the last 20, 25 years has been poor.”

Benach emphasizes the need for deregulation and favorable economic conditions to support business growth. He highlights the challenges posed by stringent regulations, employment laws, and difficulties in hiring talent from outside the EU.

Deputy head of economics at the BVMW, Marie Therese Huskin, concurs at 06:12:

“We look at the numbers, we do see that they're not doing well. We do have rising insolvencies, which we're also seeing, especially smaller companies.”

Huskin points out the rising insolvency rates among SMEs and underscores the necessity for stability, reduced bureaucracy, increased investment, and affordable energy to revive the Mittelstand sector.

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Conclusion: Navigating Economic Pressures

The spike in the UK’s inflation rate reflects a complex interplay of policy changes and market behaviors. With rising costs in education and transportation, coupled with broader global economic tensions, the Bank of England faces a challenging path in setting monetary policy. Simultaneously, economic uncertainties in Europe, particularly within Germany's Mittelstand, highlight the interconnectedness of global markets and the importance of supportive policies to foster economic resilience.

As the UK grapples with these inflationary pressures, the broader economic landscape suggests that both national policies and international developments will play pivotal roles in shaping future economic stability and growth.

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Notable Quotes:

• Will Baines [01:16]: “The fees at these schools went up. So that was a big outlier that drove the overall average up.”
• Will Baines [01:58]: “It's a difficult conundrum for the Bank of England... market expectations that there's going to be far fewer interest rate cuts this year in the UK.”
• Fabien Benach [05:38]: “It's about providing great economic conditions. The track record over the last 20, 25 years has been poor.”
• Marie Therese Huskin [06:12]: “We do have rising insolvencies, which we're also seeing, especially smaller companies.”

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For more insights and detailed economic analysis, subscribe to the Marketplace Morning Report and stay informed on the latest business and economic stories shaping our world.

Transcript

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[Nick Qureshi]

There'S been a sharp rise in the rate at which prices are rising. This is the Marketplace MORNING REPORT from the BBC World Service. I'm Nick Qureshi in for Liana Byrne. Hello. The UK's inflation rate has jumped from 2 and a half percent to 3%. That is the highest level in 10 months. Perhaps a growing sign of an economy under pressure. The BBC's Will Baines with me. So Will, somewhat of a surprise is this high.

[Will Baines]

Yeah. Morning, Nick. Yeah, it was a bit of a surprise actually. I think because the bank of England central bank here in the UK kind of been flagging that inflation might be on the way. We just didn't quite think it was going to come quite as soon as this big spike. There were some one offs, if you like, that drove that a bit. So one is a policy around changing the kind of tax relief that private schools. So fee paying schools here in the UK have that is going in the spring and as a result a lot of the fees at these schools went up. So that was a big outlier that drove the overall average up. The other was that airlines here in the UK normally would be discounting their prices and they didn't do that that much this Christmas. So transport was another big driver of that headline figure.

[Nick Qureshi]

What does this mean for interest rates?

[Will Baines]

Will normally you would think, wouldn't naturally, a economy under pressure would mean one of the ways you kind of relieve that pressure is cutting interest rates, encouraging us to borrow a bit more, companies to borrow and expand a bit more. But this inflation data today and that trajectory of where it might be going with energy bills going up a bit here in the UK too, water bills going up and those price rises I just mentioned, it's a difficult conundrum for the bank of England, the usual kind of economic orthodoxy, perhaps not there. So it'd be very interesting. I think like in the United States, there's certainly now market expectations that there's going to be far fewer interest rate cuts this year in the UK and when they happen, may well be later in the year rather than sooner in the year.

[Nick Qureshi]

Well, Ben, thanks a lot.

[Will Baines]

Thanks a lot, Nick.

[Nick Qureshi]

Next this morning, ambassadors in the European Union have agreed a new round of sanctions on Russia. According to reports, the 16th package of sanctions includes a ban on Russian primary aluminium imports and listing of 73 new Shadow fleet vessels. The sanctions will be formally approved by EU ministers on Monday, which will also mark the third anniversary of Moscow's full scale invasion of Ukraine. This news comes amid President Trump's push for negotiations for a peace deal between Ukraine and Russia. All right, let's do the numbers. Oil prices have edged up on concerns of supply disruptions in the US And Russia markets. Waiting for clarity on Ukraine peace talks there. Brent crude futures were up half a percentage point at just over $76 a barrel. And banking giant HSBC is aiming to save $1.8 billion in costs by the end of next year. Its new CEO revamping the bank to boost profit while navigating mixed interest rate policies and profound geopolitical changes. German voters will be heading to the polls on Sunday to decide on a new government after the previous coalition collapsed in a row over spending. It's the biggest economy in Europe, but is struggling and shrank last year. The BBC's Theo Leggett has been to a business park in Berlin to gauge opinions among so called Mittelstand companies. The small and medium sized firms, often family owned and in industrial heartlands. They make up 99% of companies in the country and their health is vital for the economy.

[Fabien Benach]

Right now we are in the middle of our robotics prototype lab. So this is a large hallway where all of our robotics prototypes are being fabricated by our teams.

[Theo Leggett]

In his robotics lab, surrounded by half built machines, sections of wiring and pieces of diving gear, I meet with Fabien Benach. He's head of EVA Logics, a family owned firm that builds underwater robots. The first thing he shows me looks remarkably like a penguin.

[Fabien Benach]

So this is, I would say an artificial penguin robot. We call it the Quadroin Quadroin because it's a robot with four propellers. It's designed to do climate and environmental research underwater.

[Theo Leggett]

Evologix is a classic family owned mittelstand firm. At the moment, business is good and the company is expanding. But Worries about the future are never far away.

[Fabien Benach]

Some of the obstacles that we face is of course, regulation. So when it comes to artificial intelligence, when it comes to sensor technologies, when it comes to data handling, there's just lots of of different obstacles. But it's also the plain ways of doing business in Germany and in Europe, with employment laws, with being able to hire talent, talent from outside the European Union, for instance.

[Theo Leggett]

What do you want to see? What would a more business friendly government for you look like?

[Fabien Benach]

If you ask me for personal wish, I would say massive deregulation. I would like to see for two, three weeks in a row. I would like to have the business news that we see from Argentina and to have them in Germany. For a while. It's about providing great economic conditions. The track record over the last 20, 25 years has been poor.

[Theo Leggett]

Fabien Benach of Evologix, Marie Therese Huskin is deputy head of economics at the bvmw, the trade association that represents the Mittelstand. Is it fair to say that the Mittelstand is in crisis at the moment?

[Marie Therese Huskin]

It definitely is. We look at the numbers, we do see that they're not doing well. We do have rising insolvencies, which we're also seeing, especially smaller companies.

[Theo Leggett]

Do you think it can, with the right reforms, become prosperous again? Because it sounds like a poor outlook for Germany.

[Marie Therese Huskin]

If it doesn't, it definitely can get better. What we're also seeing from surveys is that a lot of SMEs do want to invest, especially if it comes to the energy transition. But because there's sort of a climate of insecurity at the moment, nobody is investing. So one big demand that we're also having is to actually be able to plan ahead again.

[Theo Leggett]

Stability and certainty, less bureaucracy, more investment and cheaper energy. These are the kind of things Mittelstand firms told us they were looking for. But meeting those demands looks like a harsh challenge. I'm the BBC's Theo Leggett for Marketplace.

[Nick Qureshi]

Do subscribe to our podcast search for the global edition of Marketplace Morning Report in the uk. I'm Nick Qureshi, in for for Liana Byrne. Liana's back tomorrow.

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