The Rest Is Money - Episode 174: "What Is Really Going On With Inflation"

Hosts: Robert Peston & Steph McGovern
Date: May 21, 2025
Theme: A deep dive into the current inflation surge, its causes, economic policy impacts, and what it means for savers, workers, and markets.

Overview

In this episode, Robert Peston and Steph McGovern dissect the latest UK inflation figures, untangling the causes behind the increase and examining the broader implications for interest rates, wages, business, and government policy. They also discuss Labour’s proposed tax changes, the challenge of incentivizing saving and investment, and end with a look at US fiscal policy and the global credit rating downgrades.

Key Discussion Points & Insights

1. The Latest Inflation Spike

[03:09 - 07:10]

• Headline: Inflation is up to 3.5% — the highest since February last year.
• Main causes: Energy, food, and transport costs are all climbing, with energy bills particularly aggressive.
  • “Energy bills are the things that [my business partner] said are really, really hitting them now.” — Robert (03:34)
• Surprise to experts: The rise is above both Bank of England (BoE) and market forecasts (3.5% actual vs. 3.4% BoE estimate, 3.3% market consensus).
  • “This 3.5 is higher than what the Bank of England was forecasting, which was 3.4, and the sort of average of market forecasters was 3.3, so it is a bit worse.” — Steph (03:58)
• Particular pain point: Water bills up 26.1%
  • “Inflation in our water bills, 26.1%. I mean, those blooming waterfalls.” — Steph (05:12)

Notable Segment:

• [Highlight — 04:55] Impact of wage and tax changes: Businesses are passing national insurance and minimum wage increases onto consumer prices, worsening the cost of living.
  • “Supermarkets have put up their prices in order to make the pay rises for their staff more affordable and in order to pay the very significant increase in employers’ national insurance.” — Steph (06:19)

2. The Inflation Feedback Loop & Policy Dilemmas

[07:10 - 12:03]

• Wage-price spiral concerns: Steph discusses how higher input costs (taxes, wages) are being passed to consumers, stoking persistent ("sticky") service inflation.
• Interest rate trajectory: Higher-than-expected inflation means slower drops in interest rates; bad news for those with mortgages or business loans.
• Bank of England’s Monetary Policy Committee (MPC) division:
  • Recent vote split: 5 for a 0.25% cut, 2 for a 0.5% cut, 2 (including chief economist Hugh Pill) wanted no cut.
  • “It makes it very hard, whether you’re a business [...] or a householder, wondering, is this the moment to refinance my mortgage? Is this the time to lock in interest rates?”— Steph (09:26)

Notable Quote

• “Until you actually see it, you can’t be certain that businesses aren’t going to absorb the tax hit. We said on this podcast that we thought it would be passed on in the form of higher prices. And indeed that is what has happened.” — Steph (07:35)

3. Structural Forces: Wages, Immigration, Skills Shortages

[12:03 - 16:44]

• Hugh Pill’s evolving stance: Initially wanted to keep rates higher for longer, now more publicly dissenting from the majority.
• Wage stickiness: Despite mild rises in unemployment and fewer vacancies, pay rises remain, in part due to fewer low-wage migrants.
  • “Are we, in fact, seeing employers who now can’t employ cheaper people from abroad being forced to pay the indigenous population more? [...] For the medium term, that’s a very good thing.” — Steph (14:51)
• Skill shortages: Specific labor markets like welders are especially impacted.
  • “If you’re a welder now, ask for more money—because you’re going to get it. [...] There’s big gaps in skills, particularly in these sectors.” — Robert (15:18)

4. Growth: Good News or Danger Sign?

[16:44 - 19:21]

• First quarter GDP up 0.7% — better than expected, but may spell trouble if demand is outpacing supply, risking further inflation.
  • “The concern is we all thought, yippee, 0.7%, and that could [...] lead at last to a recovery in living standards. But if it now turns out that that is demand-led beyond the capacity of the economy [...] then we are going to have to get used to again, to an extent forced by the Bank of England not cutting interest rates fast enough to lower growth again until investment actually leads to higher productivity.” — Steph (18:34)

5. Leaked Memo: Labour’s Tax Plans

[19:52 - 24:33]

• Angela Rayner’s memo to Rachel Reeves: Advocated for higher taxes on savers and investors—restoring the pensions lifetime allowance, ending inheritance tax relief for AIM shares, tightening stamp duty loopholes, raising the bank surcharge, increasing taxes on certain property holdings.
  • “It was basically a tax raid on savers. [...] The incentive to do well in life, the incentive to save, has been demolished by Labour.” — Robert (21:16)
• Impact on investment: Steph warns some proposals could discourage investment in productive areas.
  • “You could argue that the inheritance tax relief on AIM shares would discourage people investing in the kind of businesses we need, particularly younger, smaller, entrepreneurial businesses.” — Steph (22:23)

6. How to Incentivize Saving & Investment

[24:33 - 31:34]

• Pensions lifetime allowance: Removing/ reinstating the cap may affect behavior (e.g., early NHS retirements previously occurred to avoid tax hit).
• Future of ISAs: The Treasury is mooting removing the income tax break on cash ISAs and potentially limiting tax breaks to investments in British shares to boost the domestic market.
  • Steph: “In a world where money is tight for the government and it massively is tight for the government, the question is, should they in effect be subsidizing the banks?”
  • Robert: “There’s a communication and financial literacy point, a bigger point about teaching people about risk and what risk really looks like, and therefore allowing people to make those decisions where they feel more confident to put their money in stocks and shares.” (31:12)
• Stocks and shares ISAs mainly benefit US companies ("Magnificent Seven")
  • Steph: “If you had been told you could only get these returns on investments in British shares, you would have put a different pot of money in American shares that wouldn’t have got the tax breaks, because you’re still going to get the returns.” (29:19)

7. Global Perspective: US Tax Cuts & Credit Downgrades

[31:35 - 36:42]

• Trump’s “big, beautiful tax bill”: New proposed US tax cuts, despite large deficits, have led to a Moody’s credit rating downgrade.
  • “With Moody’s, your top rating is called AAA. Now they’ve downgraded America one notch because of this rising level of government debt.” — Robert (33:08)
  • “In a sense, it’s just a reflection of the economic reality we’re in, which is, across the developed world, government debt levels have been on a starkly rising path.” — Steph (33:55)
• Structural problem: Aging populations and rising pension/ healthcare costs are fueling debts globally.
• Rating agencies’ impact: Moody’s, S&P, and Fitch all downgraded the US; notable but not yet a market crisis.

Memorable Moment:

• Robert’s light-hearted take on the Washington response:
  • “My favorite thing is about this downgrade by Moody’s is Washington’s reaction to it, which was to slag off an economist at Moody’s. [...] He actually has nothing to do with the ratings side of things.” (36:01)

Select Quotes & Timestamps

• “This 3.5 is higher than what the Bank of England was forecasting, which was 3.4, and the sort of average of market forecasters was 3.3, so it is a bit worse.” — Steph (03:58)
• “If you’re a welder now, ask for more money—because you’re going to get it.” — Robert (15:18)
• “The incentive to do well in life, the incentive to save, has been demolished by Labour.” — Robert (21:16)
• “There’s a communication and financial literacy point, a bigger point about teaching people about risk and what risk really looks like...” — Robert (31:12)
• “In a sense, it’s just a reflection of the economic reality we’re in, which is, across the developed world, government debt levels have been on a starkly rising path.” — Steph (33:55)

Timestamps for Key Segments

• [03:09] Inflation figures and causes
• [07:10] Policy impact: Wage-price spiral, BoE response
• [12:03] BoE voting split and internal dynamics
• [14:51] Labour markets and skills shortages
• [16:44] UK growth data and risks
• [19:52] Angela Rayner's leaked tax proposal
• [24:33] Pensions and ISA tax policy debate
• [31:34] Cash ISAs, investment risk, and communication
• [33:08] US tax policy and global credit ratings
• [36:01] Moody’s downgrade and US/UK debt context

Final Thought

This episode offers a nuanced, engaging look at inflation’s causes, the policy tussle over rates, wages, and taxes, and the challenge of balancing fiscal responsibility with incentives to invest and save. Peston and McGovern deliver candid analysis, relatable anecdotes, and an accessible take on complex forces shaping the economic landscape.

Essential listening for anyone seeking to understand not just what’s happening with inflation, but what it means for your wallet, your investments, and the wider economy.