Monetary Policy Report - November 2024

1: The economic outlook

1.1: The conditioning assumptions underlying the MPC’s projections

As set out in Table 1.B, the MPC’s November projections are conditioned on:

• The paths for policy rates in advanced economies implied by financial markets, as captured in the usual 15 working day averages of forward interest rates to 29 October (Chart 2.6). The market-implied path for Bank Rate underpinning the November projections declines relatively rapidly in the near term and to around 3½% by the end of the three-year forecast period, similar to the endpoint in the August Report.
• A path for the sterling effective exchange rate index that is around ½% higher compared with the August Report. The exchange rate depreciates slightly over the forecast period, reflecting the role of expected interest rate differentials in the Committee’s conditioning assumption.
• Wholesale energy prices that follow their respective futures curves over the forecast period. Since August, oil prices have fallen, while gas futures prices have increased slightly (Chart 2.4). Significant uncertainty remains around the outlook for wholesale energy prices, including related to geopolitical developments.
• UK household energy prices that move in line with Bank staff estimates of the Ofgem price cap implied by the paths of wholesale gas and electricity prices (Section 2.5).
• Fiscal policy that evolves in line with UK government policies to date, as announced in Autumn Budget 2024 on 30 October (see Box B).

1.2: Key judgements and risks

1.2: Key judgement 1

Four-quarter GDP growth is expected to pick up to almost 1¾% in the first part of the forecast period, before falling back slightly.

UK GDP grew by 0.5% in 2024 Q2, slightly below expectations in the August Report. Bank staff estimate that underlying momentum in demand has been slightly weaker than this, at around ¼% per quarter. GDP growth is projected to have slowed in the second half of 2024 to around that underlying rate, consistent with the steer from a range of business surveys (Section 2.3).

UK-weighted world GDP grew by 0.5% in 2024 Q2 and is projected to have grown at a similar pace in Q3 (Section 2.1). In the November Report, the paths of global GDP and trade are broadly unchanged from the August projections. Despite some strength in Q3 and a lower market-implied path of interest rates, near-term activity in the euro area is expected to be slightly weaker in these projections than in August. The outlook for the United States has remained supported by strong potential supply growth. Four-quarter UK-weighted world GDP growth is projected to rise to just over 2% in 2025 and beyond, slightly below its average rate in the decade prior to the pandemic (Table 1.D).

There remains some downside risk to global growth if domestic demand in China proves to be softer than expected, despite the recent policy support announced by the Chinese authorities. There may also be some downside risks around growth in the euro area. There is uncertainty around the path of fiscal policy in advanced economies. The continuing risk of higher commodity prices and disruption to trade flows associated with developments in the Middle East could, alongside other significant geopolitical uncertainties, lead to weaker economic activity as well as greater external inflationary pressures (Key judgement 3).

The current stance of monetary policy is restrictive. Bank staff now judge that all of the impact of higher interest rates since the middle of 2021 on the level of UK GDP is likely to have come through. Under the latest market-implied path for interest rates, including its expected impact on broader financial conditions, monetary policy is expected to have a broadly neutral impact on GDP growth over the forecast period. The restrictiveness of policy is still pushing down inflation over the forecast, however. There remain uncertainties around the impact of monetary policy on the economy (as discussed in Box C in the August Report).

The MPC’s November projections are conditioned on fiscal policy that evolves in line with UK government policies, as announced in Autumn Budget 2024. As set out in Box B, the combined effects of the measures announced in the Budget including the additional funding for previous spending pressures are provisionally expected to boost the level of GDP by around ¾% at their peak in a year’s time relative to the August Report projections, as the stronger, and relatively front-loaded, paths for government consumption and investment more than offset the impact on growth of higher taxes. The increase in employer National Insurance contributions (NICs) is also assumed to lead to a small decrease in potential supply over the forecast period (Key judgement 2). The Committee will monitor the impact of the Budget, including ahead of its next forecast round in February.

After taking account of the latest fiscal plans but also the fading impact of past loosening measures, the overall stance of fiscal policy is still expected to tighten over the forecast period. This pulls down somewhat on the GDP growth projection in the medium term.

Overall, in the November projection, four-quarter GDP growth is projected to pick up to almost 1¾% in the first part of the forecast period, before falling back slightly (Chart 1.2). GDP growth in 2025 is somewhat stronger than in the August Report, reflecting the looser near-term stance of fiscal policy and the lower market path of interest rates over the first part of the forecast period. It is slightly weaker towards the end of the period, however, reflecting an unwind of some of the Committee’s previous judgement to boost the expected path of demand relative to its standard determinants. That change in judgement could be consistent with the upward revisions to historical GDP in Blue Book 2024, which may mean that there is less strength to come over the forecast period. It could also be consistent with more forward-looking behaviour by households and businesses such that the boost to GDP from recent fiscal news fades more quickly in the medium term than would usually be assumed.

Household spending growth is expected to follow a similar path to headline GDP growth over the forecast period, stronger in the first part of the forecast than in the August Report and weaker further out. Following downward revisions in the Blue Book, the saving ratio is expected to fall from around 10% of household income to just above 8¼% by the end of the forecast period, slightly above its pre-pandemic average. Much of this fall reflects the impact of the downward-sloping assumed path of interest rates, which would reduce incentives to save and make it cheaper to borrow. Box E discusses the risks in both directions around the saving ratio and household consumption projections. There is also uncertainty around how households will react to the news of higher government spending and taxes in the Budget, and how the state of the economy could interact with the usual pass-through of these measures to consumer spending and saving behaviour.

1.2: Key judgement 2

A margin of economic slack is projected to emerge during 2026 in part reflecting the overall tightening in the stance of fiscal policy assumed in the Budget, and also the continued restrictive stance of monetary policy.

Following a period for 2021 to 2023 in which the economy was operating with excess demand, aggregate demand and supply are judged to have been broadly in balance since the end of last year. Following the upward revisions to historical GDP in Blue Book 2024 (Chart 2.13), the degree of excess demand over the past is judged to be marginally greater than assumed at the time of the August Report. That is consistent with a judgement that around half of the news in the Blue Book is likely to have reflected additional excess demand (Section 2.4). All else equal, that also leads to a marginally higher path for the output gap currently and over much of the forecast period, relative to the August projection. The Committee continues to recognise the significant uncertainty around real-time estimates of the output gap. It also notes that recent revisions to the output gap have tended to be in the direction of greater past excess demand or a delay to the point at which excess supply is assumed to emerge.

The MPC is continuing to consider the collective steer from a wide range of indicators to inform its view on labour market developments. As discussed in Box D in the May Report, there remain concerns about the lower achieved sample sizes and therefore the quality of the data derived from the ONS Labour Force Survey, making it more difficult for the Committee to gauge the underlying state of labour market activity.

Based on a broad set of indicators, the MPC judges that the labour market continues to ease but that it appears relatively tight by historical standards. Bank staff estimate that the unemployment rate has been broadly stable recently (Chart 2.18). This has been at a rate close to the latest reading of the much more volatile LFS measure, which fell back to 4.0% in the three months to August. The vacancies to unemployment ratio has fallen moderately since the start of 2024, to around its 2019 level.

The increase in employer NICs in the Budget represents an increase in labour costs, which will initially be fully incident on businesses. But the aggregate impacts on growth and inflationary pressures in the economy will ultimately be determined by the degree to and speed with which the tax increase is transmitted into prices, wages, employment or otherwise absorbed into profit margins or productivity growth. In the MPC’s projections, the NICs change is provisionally assumed to have a small upward impact on companies’ prices and a small downward impact on wages over the forecast period (Key judgement 3). That weakness in wages is also assumed to have a small downward impact on labour supply through reduced labour market participation. The Committee will monitor closely the impact of the increase in employer NICs on the labour market and the wider economy.

Other than this small change to labour supply, the Committee has not adjusted its judgements on potential supply growth over the forecast period in this Report. The Committee will undertake a review of the determinants of the short to medium-term supply capacity of the economy in its next regular stocktake ahead of the February 2025 Report.

In the projection, aggregate demand and supply are judged to remain broadly in balance over the coming year. Demand growth is then expected to be weaker than potential supply growth during 2026, such that a margin of economic slack is projected to emerge. That in part reflects the overall tightening in the stance of fiscal policy that is assumed to occur following the Budget, and also the continued restrictive stance of monetary policy. The margin of aggregate excess supply is expected to reach around ½% of potential GDP in the medium term. Relative to the August Report projection, there is expected to be a smaller margin of excess supply throughout the forecast period and particularly during 2025 and the first half of 2026, in large part reflecting the news in the Budget.

The unemployment rate is projected to rise slightly in the second half of the forecast period, such that it reaches the assumed medium-term equilibrium rate of around 4½% by the end of the forecast period (Chart 1.3).

There remains significant uncertainty around the labour market outlook, and it could remain tighter or looser than projected for a number of reasons, including the risks around the outlook for demand (Key judgement 1). There is a risk that changes in the overall cost of employment for firms, including the increase in employer NICs and the National Living Wage, lead to greater cash-flow constraints for some businesses, particularly SMEs. There could, however, be an upside risk to labour demand if greater certainty in the fiscal outlook provides support to confidence and demand.

There continues to be significant uncertainty around the MPC’s assumption for the path of the equilibrium rate of unemployment, developments in which would, holding demand fixed, have implications for inflationary pressures. The Committee made an upward adjustment to the medium-term equilibrium rate in the November 2023 Report, reflecting a greater degree of real income resistance following the terms of trade shock to the economy. It remains possible that the equilibrium rate of unemployment is even higher, consistent with more persistence in future wage growth (as considered in one of the alternative cases for the state of the economy discussed in Box A).

1.2: Key judgement 3

Second-round effects in domestic prices and wages are expected to take somewhat longer to unwind than they did to emerge. The margin of slack that emerges later in the forecast period is sufficient to act against those second-round effects, leading CPI inflation to fall back to around the 2% target in the medium term, conditioned on the usual 15 day average of forward interest rates.

Twelve-month CPI inflation was at the MPC’s 2% target in 2024 Q3, weaker than expected in the August 2024 Report (Section 2.5), and well below the greater than 3% rate expected in the November 2023 Report.

The decline in CPI inflation since the start of this year has primarily reflected lower goods price inflation, alongside a smaller fall in services price inflation. The latter fell quite sharply to 4.9% in September, but most of the recent downside news in services inflation has been accounted for by more volatile components, some of which is expected to partially unwind in coming months. Annual private sector regular AWE growth declined to 4.8% in the three months to August, in line with expectations in the August Report and somewhat lower than the comparable forecast at the time of the November 2023 Report. Many indicators of household and business inflation expectations have normalised to around their 2010 to 2019 averages, although some household measures have risen recently.

CPI inflation is projected to increase over the next year, to around 2¾% by the second half of 2025. This profile of headline inflation is more than accounted for by developments in the direct energy price contribution to 12-month CPI inflation, which is expected to become less negative in the middle of next year and to turn slightly positive by the second half of 2025 (Chart 1.1). This is a slightly lower near-term profile for energy prices than at the time of the August Report. Relative to the assumptions in the August Report, the decision in the Budget to extend the freeze and temporary 5p cut to fuel duty rates in 2025–26 pushes down directly on inflation over the next fiscal year, offset partly by an increase in Vehicle Excise Duty, but pushes up on the 12-month inflation rate over the four quarters from 2026 Q2 as the 5p cut is assumed to expire and fuel duty is assumed to rise in line with RPI inflation thereafter.

CPI inflation excluding energy is projected to fall from 3¼% currently to around 3% in the first half of next year and to 2¾% in the second half of next year (Chart 1.1), revealing more clearly the continuing, even if gradually waning, persistence of inflationary pressures.

Four-quarter UK-weighted world export price inflation, excluding the direct effects of oil prices, was negative at the turn of this year, but has since picked up and is projected to remain slightly positive over most of the forecast period. There are risks in both directions around this projection (Section 2.1). Although there has so far continued to be a relatively limited impact on oil prices from events in the Middle East, there remains a risk of further intensification and wider economic spillovers including via greater uncertainty in financial markets. The possibility of greater trade fragmentation and increased trade restrictions could also push up on world export prices. Continued weakness in China could, however, pose a downside risk to both oil and world export prices, particularly if it were to be associated with a broader slowdown in global demand.

Alongside the sterling exchange rate, the path of world export prices is the main determinant of developments in UK import prices, which in turn pass through over time to the external pressures on CPI inflation. As discussed in Box D, the Committee has made a number of judgements over recent years on the pass-through of sterling world export prices to UK import and consumer prices. In this Report, the MPC now judges that less of the unexpected strength in import prices observed in the past will unwind, pushing up on import price inflation over the forecast period, and more than offsetting some downside news on world export prices and the impact of sterling’s appreciation since the August Report. Import prices are projected to be flat in 2025 and to increase by ¾% in 2026, both somewhat stronger than the falls in import prices expected over that period in the August projection (Table 1.D).

In the November projection for CPI inflation, the Committee has maintained its broad judgement that second-round effects in wages and domestic prices will take somewhat longer to unwind than they did to emerge. As a margin of slack in the economy emerges during 2026 in the forecast (Key judgement 2), the degree of excess inflationary persistence embedded in the CPI projection starts to fade from this point onwards. In this sense, the Committee’s projection is based on the second case set out in the September MPC minutes, in which a period of economic slack may be required in order for pay and price-setting dynamics to normalise fully. In order to set monetary policy in this case, the MPC needs to consider the trade-off, that emerges to some degree in the forecast, between the speed with which inflation should be brought back down to the 2% target and the costs in terms of employment and output which doing that involves.

There remains considerable uncertainty around the calibration of the Committee’s judgement on the current degree and future path of second-round effects in wages and domestic prices. This includes the extent to which persistent pressures prove more enduring than in the forecast, or unwind more quickly, and the role that monetary policy may need to play in ensuring that inflation returns to target in the medium term. These alternative cases for the underlying behaviour of the economy and inflationary persistence are outlined in detail in Box A. The Committee also continues to monitor the accumulation of evidence from a broad range of indicators, with a focus on the extent to which it is possible over time to use developments in data series to assess the various cases that it is considering.

In the projection conditioned on the market-implied path of interest rates in the 15 working days to 29 October, CPI inflation increases from the 2% target in 2024 Q3 to around 2¾% by the second half of 2025. Reflecting the continued restrictive stance of monetary policy and the emergence of a margin of slack in the economy, CPI inflation then falls back to around the 2% target in the medium term (Chart 1.4 and Table 1.C). The November CPI projection is somewhat higher than in August beyond the first few quarters of the forecast period. This reflects the smaller margin of excess supply (Key judgement 2), the news in the Autumn Budget on fuel duty that boosts inflation over the 12 months from 2026 Q2, and the impact of the higher projection for import price inflation.

Private sector regular AWE growth is expected to fall further and to reach around 3% by the start of 2026, remaining close to that level thereafter. This is slightly higher throughout the forecast period than in the August Report, reflecting the smaller margin of excess supply in the economy, offset slightly by an assumption in this forecast that a small part of the increase in employer NICs will be passed through into lower wages (Key judgement 2).

Table 1.D: Indicative projections consistent with the MPC's forecast ^{(a) (b)}

2: Current economic conditions

Chart 2.1: In the MPC’s latest projections, headline GDP growth falls back slightly and the unemployment rate is flat in the second half of this year; CPI inflation rises moderately in Q4

Near-term projections ^(a)

• Sources: ONS and Bank calculations.
• (a) The lighter diamonds show Bank staff’s projections at the time of the August 2024 Monetary Policy Report. The darker diamonds show Bank staff’s current projections. Projections for GDP growth and the unemployment rate are quarterly and show 2024 Q3 and Q4 (August projections show 2024 Q2 to 2024 Q4). Projections for CPI inflation are monthly and show October to December 2024 (August projections show July to December 2024). The GDP growth and unemployment rate projections for 2024 Q3 are based on official data to August, while the CPI inflation figure is an outturn. Although LFS unemployment data have been re-instated by the ONS, they are badged as official statistics in development and the LFS continues to suffer from very low response rates, which can introduce volatility and potentially non-response bias (Box D, May 2024 Report).

2.1: Global economy and financial markets

Global activity growth is expected to remain steady.

Demand conditions in other countries are an important determinant of UK trading prospects. UK-weighted world GDP grew by 0.5% in 2024 Q2 and is projected to have grown at a similar pace in Q3. Four-quarter global growth is expected to remain around this pace in 2024 Q4 (Chart 2.2).

Chart 2.2: Global GDP growth is projected to remain steady

Four-quarter UK-weighted world GDP growth with contributions by region ^(a)

• Sources: LSEG Workspace and Bank calculations.
• (a) See footnote (c) of Table 1.D for definition. Figures for 2024 Q3 to 2025 Q1 are Bank staff projections. These projections do not include the advance estimate of US GDP in 2024 Q3 or the preliminary flash estimate of euro-area GDP for the same quarter, as the data were not received in time to incorporate fully into the forecast.

According to the advance estimate, US GDP expanded by 0.7% in 2024 Q3, following growth of 0.7% in Q2. US GDP growth is expected to remain robust at 0.5% in Q4, consistent with the composite output PMI and monthly retail sales data having remained resilient, and with US supply growth being expected to remain strong. There are risks to US demand and activity in both directions. US labour market data have been volatile in recent months, but vacancies have fallen steadily towards pre-pandemic levels. On the one hand, a further decline in labour demand could be associated with a larger-than-expected rise in unemployment, which may weigh on confidence and reduce spending. On the other hand, US supply growth could be stronger than expected, further supporting activity.

According to the preliminary flash release, euro-area GDP grew by 0.4% in 2024 Q3, above the 0.2% growth in Q2 and higher than expected in the August Report. Developments have, however, been mixed across the largest euro-area economies, with German GDP growth underperforming, in part reflecting weakness in Chinese demand and a subdued outlook for global manufacturing growth. The recent weakening in forward-looking indicators such as the euro-area PMI highlights downside risks to euro-area demand. While the euro-area labour market remains resilient, it has loosened in recent months and vacancies are approaching historically normal levels. There is a risk that further demand weakness could be amplified if unemployment increases.

While China accounts for only a small share of UK exports, its prominent role in global manufacturing lends it an important influence in commodities and globally traded goods markets. Chinese GDP growth remains weak, having expanded by 0.9% in 2024 Q3, up from 0.5% in Q2 but slightly below the projection in the August Report. Chinese growth is expected to pick up in the November projections, driven partly by policy support. However, there is a risk that subdued consumer spending and weakness in the property sector continue to drag on growth.

Global export price inflation is expected to remain subdued, with risks in both directions.

Following sharp increases in 2021 and 2022, global export price inflation fell back in 2023. Four-quarter world export price inflation, excluding major oil exporters, is projected to be around ½% at the end of this year, slightly lower than expected at the time of the August Report (Box D). However, there is significant uncertainty around this central projection, with downside risks emanating from China and upside risks from the Middle East.

Chart 2.3: Export price inflation has picked up slightly, but remains weak in China

Four-quarter export price inflation across regions ^(a)

• Sources: European Central Bank (ECB), General Administration of Customs of the People’s Republic of China, US Bureau of Economic Analysis, other national statistical agencies and Bank calculations.
• (a) ‘Rest of world’ is a weighted average of 31 countries excluding major oil exporters and including China. Countries are weighted by their shares of UK imports. The final data points refer to 2024 Q2.

Chinese export prices have fallen since 2023 (Chart 2.3), partly driven by subdued domestic inflationary pressures resulting from weak domestic demand. A crystallisation of the downside risks to domestic demand discussed above could prevent a recovery in Chinese export prices and put further downward pressure on global goods price inflation. Staff analysis suggests that the associated spillovers to the UK would be modest but could be more material if associated with a broader slowdown in global demand growth.

Geopolitical developments in the Middle East pose upside risks to energy and global goods prices.

Geopolitical risks have intensified following events in the Middle East, although there has so far been a limited impact on wholesale energy prices. A further escalation in tensions could lead to a significant rise in oil prices and, since oil is an input into the production for many goods, global goods price inflation. Such an escalation in tensions could also affect the UK through other channels, including via greater uncertainty in financial markets.

Despite recent developments in the Middle East, oil prices have fallen since the August Report, which may partly reflect downside risks to the global demand outlook.

Staff analysis suggests that perceptions of risks to global oil supply, stemming mainly from geopolitical events in the Middle East, have pushed up oil prices somewhat since the August Report. Nevertheless, the Brent spot and near-term futures oil price, converted into sterling terms, has fallen by around 10% (Chart 2.4). Anticipated increases in OPEC+ oil production have weighed on oil prices, but some of the fall may also reflect weaker-than-expected growth in China and perceptions of downside risks to the global demand outlook. Meanwhile, European wholesale natural gas prices have increased modestly.

Chart 2.4: Oil prices have fallen since the August Report, while gas prices have increased modestly

UK wholesale oil and gas prices ^(a)

• Sources: Bloomberg Finance L.P. and Bank calculations.
• (a) Oil prices are Brent crude, converted to sterling. Gas prices are Bloomberg UK NBP Natural Gas Forward Day price. Dashed lines refer to respective futures curves using one-month forward prices based on the 15-day average to 29 October 2024, while dotted lines are based on the 15-day average to 22 July 2024. The final data points shown are forward prices for December 2027.

A cooling in non-labour costs has driven a moderation in services inflation across economies.

Headline and core consumer price inflation have fallen back from their 2022 peaks in the US and in the euro area. Falls in core inflation over recent quarters have been accounted for mainly by weaker core goods price inflation, on account of stronger global supply conditions and the indirect effects of lower energy prices.

Consumer services price inflation is falling back more slowly across regions. The moderation in services inflation has, to date, largely reflected a reduction in non-labour costs (Chart 2.5). As wage growth continues to ease, services inflation is expected to fall further.

Chart 2.5: Services inflation is moderating across regions

Contributions to annual core services price inflation ^(a)

• Sources: Eurostat, ONS, US Bureau of Economic Analysis and Bank calculations.
• (a) The data shown are HICP core services inflation for the euro area, PCE services inflation excluding energy and housing for the US, and core services inflation excluding rents for the UK. The latest data are for 2024 Q3 for the US and the UK and for 2024 Q2 for the euro area. The UK model is estimated based on seasonally adjusted quarterly data excluding VAT. Estimated contributions to services inflation are based on autoregressive distributed lag regressions of services inflation on metrics of pay growth (orange bars) and manufacturing PPI inflation (aqua bars). See also Greene (2024) and Mann (2024). Note that services inflation in the US has also been boosted by continued strength in housing services inflation, which has been stripped out of these data.

Headline inflation is now close to central banks’ targets across advanced economies.

US headline PCE inflation fell to 2.1% in September. Upside risks to US inflation remain, such as from the possibility of larger-than-expected persistence in shelter inflation and higher oil prices, although there are also downside risks from a greater-than-expected softening in the labour market. Euro-area headline inflation was at the ECB’s 2% target in October but is expected to rise somewhat at the end of the year as previous falls in energy prices drop out of the annual comparison. In both economies, further reductions in core inflation will likely need to rely on a continued normalisation of wage pressures, the speed of which remains uncertain.

The market-implied paths for policy rates on which the November forecast is conditioned have shifted down since the August Report.

In recent months, central banks in the UK, US and euro area have begun to reduce their respective policy rates (Chart 2.6). The Federal Reserve’s Federal Open Market Committee reduced the target range for the federal funds rate by 50 basis points to 4.75%–5% in September, while the ECB Governing Council cut its main policy rate by 25 basis points to 3.25% in October.

The market-implied paths based on the 15 days up to 29 October are consistent with a continued reduction in policy rates in coming quarters across advanced economies, though the expected pace and extent of reduction differ. Since the August Report, fading inflationary pressures in the US as well as communications from the Fed have been associated with a shift down in the market-implied path for US policy rates of around 30 basis points on average over the next three years. Market expectations for euro-area and UK policy rates have fallen by 60 basis points and 20 basis points respectively. Across jurisdictions, expected policy rates have moved down more materially in the near term than in the medium term since the August Report. Policy rates are now expected to stand at 2.0% in the euro area, 3.4% in the US and 3.6% in the UK in three years’ time.

Chart 2.6: Policy rate expectations have shifted down since the August Report

Policy rates and forward curves for the US, euro area and UK ^(a)

• Sources: Bloomberg Finance L.P. and Bank calculations.
• (a) All data as of 29 October 2024. The August curves are estimated based on the 15 UK working days to 22 July 2024. The November curves are estimated using the 15 working days to 29 October 2024. Federal funds rate is the upper bound of the announced target range. ECB deposit rate is based on the date from which changes in policy rates are effective. The final data points shown are forward rates for December 2027.

Financial conditions are broadly unchanged, while the sterling exchange rate has appreciated.

Corporate bond spreads have narrowed slightly across advanced economies since August, while equity prices have picked up by 4% in the US and by 1% in the UK and in the euro area. The sterling effective exchange rate has appreciated by 0.7% since the August Report. All else equal, that will put some downward pressure on UK import price inflation (Box D and Section 2.5). Sterling has appreciated by around 1% against both the dollar and the euro, reflecting in part the relatively smaller decline in market expectations for UK policy rates since August.

2.2: Credit conditions

The reduction in Bank Rate in August and the associated falls in market interest rates have been feeding through to household lending and deposit rates.

The MPC reduced Bank Rate by 25 basis points in August 2024 and the market-implied path for interest rates has fallen since its peak around May 2024. That fall in interest rates has begun to pass through to household loan and deposit rates. Pass-through so far appears to be progressing in line with expectations, with interest rates for some retail products taking time to fall, reflecting the typical lags between reference rate changes and product rate changes.

Quoted instant-access deposit rates, for which Bank Rate is the main reference rate, had fallen by 11 basis points on average by October, a little under half of the reduction in Bank Rate (Chart 2.7). Credit card rates were largely unchanged, reflecting the fact that these rates tend to respond to changes in reference rates extremely slowly.

OIS rates have fallen by more than Bank Rate and that has been reflected in larger falls, on average, in mortgage and term deposit rates. Average quoted rates on mortgages with a loan to value (LTV) ratio of 75% had fallen by 78 basis points since May. Rates for mortgages with higher LTV ratios had fallen by less. Two-year fixed rate savings rates had fallen by 40 basis points by October. OIS reference rates have increased somewhat in recent weeks, although it is too soon to assess the impact on household and corporate rates.

Chart 2.7: The declines in Bank Rate and the market-implied path of future Bank Rate have started to feed through to household deposit and lending rates

Changes in average interest rates on selected household products and their respective reference rates between May and October 2024 ^(a)

• Sources: Bank of England, Bloomberg Finance L.P. and Bank calculations.
• (a) Loan and deposit rates are based on average quoted rates. The Bank’s quoted rates series are weighted monthly average rates advertised by all UK banks and building societies with products meeting the specific criteria. For more information, see Introduction of new Quoted Rates data. The 75% and 90% LTV mortgage rates are for two-year fixed-rate products. The reference rate for these, and for fixed-rate savings bonds, is the two-year overnight index swap (OIS) rate. Deposit and loan rates used for October represent averages of daily quoted rates using data to 29 October 2024 and were provisional. OIS rate and Bank Rate show monthly averages with OIS rates including daily rates up to 29 October 2024. Personal loans are excluded as recent changes in average quoted rates have been partly driven by a change in the composition of lenders in the data sample.

Despite the fall in quoted rates for new lending, past interest rate rises are continuing to feed through to higher interest rates for existing mortgagors.

Most UK mortgages are held on a fixed-rate basis, with around two-thirds of the stock of mortgages currently at a five-year fixed rate period from origination. This means that many households who took out mortgages prior to the sharp rise in interest rates in 2021 are yet to face an increase in their mortgage costs. Around 800,000 fixed-rate mortgages currently with an interest rate of 3% or below are expected to be refinanced per year, on average, until the end of 2027. Some mortgage holders have reduced their spending in anticipation of paying higher rates (Box E). Interest rates for those on variable rate mortgages have fallen, however, and a growing number of those who are already paying higher rates may be able to refinance at a lower rate over the next two years.

Money growth has been normalising since its post-pandemic weakness.

Aggregate broad money holdings increased markedly during the pandemic, reflecting a combination of resilient bank lending growth and the effects of quantitative easing (Box B in the May 2024 Report). This was followed by a period of notably weak money growth in 2022 and 2023, such that the ratios of aggregate money to GDP and household holdings of money to gross disposable income have returned to close to, although a little below, their pre-pandemic trends (left panel in Chart 2.8).

Money growth has picked up in 2024. In the year to 2024 Q2, aggregate money increased by 1.0% and growth in household money was 3.6% (right panel of Chart 2.8). These growth rates are slightly weaker than on average prior to the pandemic, however, particularly for aggregate money. That reflects continuing weakness in bank lending growth and the impact of quantitative tightening, which in the first instance reduces the deposits of non-bank investors who purchase government bonds from the Bank of England.

Chart 2.8: The money overhang that emerged during the pandemic has been eroded

Ratio of aggregate broad money to nominal GDP and household broad money to annualised gross disposable income (left panel) and four-quarter growth in aggregate and household broad money (right panel) ^(a)

• Sources: Bank of England, ONS and Bank calculations.
• (a) Aggregate broad money captures M4 excluding the deposits of intermediate other financial corporations. For more detail on what is captured within the household sector, see Further details about sectoral analysis of M4 and M4 lending data. The dashed line in the left panel shows the 2012–19 trend in the ratio of aggregate broad money to nominal GDP, projected forward. Final data points shown are for 2024 Q2.

Higher interest rates meant that time deposits and cash ISAs captured a greater share of household savings flows in late 2022 and 2023, but savings patterns in 2024 have been closer to historical norms.

During the pandemic, some households were able to increase their savings as spending opportunities were limited, with much of this showing up as a flow into interest-bearing sight deposits (Chart 2.9). As interest rates rose, household time deposit rates rose faster than rates on sight deposits such that the interest rate differential between fixed-rate and instant-access accounts grew larger. This encouraged households to shift savings from sight deposits to time deposits. Higher interest rates also encouraged additional use of ISA accounts as more households started to receive interest income in excess of the minimum tax threshold. Box E discusses aggregate trends in savings in more detail.

More recently, household deposit flows have returned to patterns closer to those in the years prior to the pandemic. The average spread between a two-year fixed-rate deposit account and an instant-access account has declined by around 180 basis points since its peak in July 2023. Net inflows into time deposit accounts are now small. Flows into cash ISA accounts continue to be higher than in recent years, and higher than the 2013–19 average. As deposit flows tend to be small relative to the stock of deposits, these changes in flows have had little impact on the overall composition of household savings.

Chart 2.9: There have been material changes in the pattern of household saving over the past four years

Real household deposit and money flows, by product, £ billions ^(a)

• Sources: Bank of England and Bank calculations.
• (a) Cash ISA deposits include both sight and time deposits as available data do not provide a split between these accounts. Deposit flows are deflated with the CPI index and shown in August 2024 prices. Latest data are to August 2024.

There are signs that housing market activity is picking up…

Housing market activity appears to be recovering from the lows observed in 2023. Monthly mortgage approvals for house purchase, a key part of the pipeline for housing market activity, have risen by around 50% since the start of 2023 and are now close to their average between 2014 and the start of the pandemic. Intelligence from the Bank’s Agents suggests there is growing optimism among estate agents around the prospects for housing market activity in 2025, despite some reporting a brief lull in activity in the run-up to the Budget.

In line with the recovery in mortgage approvals, nominal house prices have continued to pick up. The range of measures shown in Chart 2.10 points to a rise in house prices over the past year. The ONS measure rose by 2.7% over the 12 months to August, and by 0.4% in real terms. That followed a 2.6% and 6.3% fall in nominal and real terms respectively over 2023. The recovery in house prices partly reflects a waning drag from past interest rate rises, consistent with the impact of higher interest rates having materialised more quickly than in the past, as discussed in Box C of the August 2024 Report.

Chart 2.10: House prices have risen in 2024

House price indices ^(a)

• Sources: Nationwide, ONS, LSEG Workspace, Rightmove.co.uk, S&P Global/Halifax and Bank calculations.
• (a) The latest data point for the ONS House Price Index is August 2024. Halifax and Nationwide data to September 2024 and Rightmove data to October 2024 are advanced to reflect the respective timing of each data source in the house-buying process. The Nationwide and Halifax figures for October were released after the data cut-off.

…and that recovery will boost household secured lending growth, which currently remains weak.

The recovery in housing market activity has led to a small turnaround in the growth rate of secured lending to households. Secured household lending growth remains weak in real terms, however, and has been negative since late 2021 (Chart 2.11). A continued pickup in housing market activity should lead to a strengthening in secured lending growth. Consistent with that, banks responding to the 2024 Q3 Credit Conditions Survey expected demand for secured credit to increase in 2024 Q4.

Chart 2.11: Secured household lending growth has risen but remains subdued

Twelve-month growth rate of M4 lending in real terms, by sector ^(a)

• Sources: Bank of England and Bank calculations.
• (a) Private non-financial corporation (PNFC) lending includes loans to and securities issued by private non-financial corporations. Changes in the stock of M4 include transactions and other changes in asset values, see Further details about changes, flows, growth rates data. Data are deflated using the CPI index. Final data points refer to August 2024.

Consumer credit growth has slowed a little but remains strong.

In contrast to the weakness in mortgage lending, consumer credit growth has been strong for the past year, particularly growth in credit card lending. After falling during the pandemic, twelve-month growth in credit card lending, measured in real terms, climbed to around 5% in the second half of 2023 (Chart 2.11). That may have partly reflected a post-pandemic catch-up as wealthier households built up transactor balances (those balances which cover monthly expenditure and then are paid off each month, in contrast to balances which are not paid off each month and are charged interest). And some households may have borrowed to smooth their consumption in response to recent high inflation (StepChange (2024)). Credit card lending growth has fallen back slightly over 2024 but it remains elevated. Banks responding to the 2024 Q3 Credit Conditions Survey, on average, expected a small decrease in unsecured household lending in 2024 Q4.

There has been a notable pickup in corporate lending, although it remains weak.

Corporate lending was weak following the pandemic, reflecting the fact that many businesses had borrowed through the various pandemic-era government loan schemes. But real corporate lending growth has since recovered somewhat. Banks responding to the 2024 Q3 Credit Conditions Survey expected an increase in demand for lending from medium and large businesses in Q4. Small and medium-sized enterprise (SME) lending remains weak, in part reflecting continued repayments of pandemic-era loans. Responses to the Q3 Credit Conditions Survey pointed to a modest expected fall in demand for credit for small firms in Q4, consistent with intelligence from the Bank’s Agents.

2.3: Domestic activity

GDP growth in 2024 Q2 was slightly weaker than expected…

GDP grew by 0.5% in 2024 Q2, 0.2 percentage points below the projection in the August Report. The largest positive contributions were from business investment and government expenditure, partly offset by a contraction in housing investment (Chart 2.12).

Chart 2.12: GDP growth has been positive in 2024 but is expected to have weakened slightly in the second half of the year

Contributions to quarterly GDP growth ^(a)

• Sources: ONS and Bank calculations.
• (a) Diamonds show quarterly headline GDP growth. Figures for 2024 Q3 and Q4 are Bank staff projections.

…but Blue Book 2024 materially revised up estimated GDP, implying a stronger recovery from the pandemic.

Data revisions in Blue Book 2024 indicate that the recovery in GDP since the pandemic was stronger than previously estimated, particularly in late 2021 and early 2022. The level of real GDP in 2024 Q2 was 2.9% higher than in 2019 Q4, 0.5 percentage points higher than the estimate prior to the Blue Book revisions (Chart 2.13). Dynamics over 2023 and 2024 have been revised relatively little. Consumption accounted for most of the upward revision to GDP: consumption in 2024 Q2 is now estimated to have grown by 1.5% since 2019 Q4, compared with the previous estimate of -1.3%. The revisions to household consumption have important implications for the household saving ratio, discussed further in Box E.

Chart 2.13: Consumption and GDP were revised materially higher in Blue Book 2024

GDP and household consumption, chained-volume measures ^(a)

• Sources: ONS and Bank calculations.
• (a) Household consumption includes consumption by non-profit institutions serving households. The final data points are for 2024 Q2.

GDP growth is expected to have fallen back to Bank staff’s estimates of underlying momentum in the second half of 2024.

GDP growth is projected to slow in the second half of this year, to 0.2% in Q3 and 0.3% in Q4. Headline GDP growth has been volatile over the past year, with negative growth in 2023 before strong growth in early 2024. But Bank staff’s indicator model, consistent with the collective steer from business surveys, has implied a smoother path for output growth over that period (Chart 2.14). On balance, while there is judged to have been some weakening in output in late 2023, reflecting the effects of higher interest rates, followed by an unwind of that weakness in the first half of this year, that pattern is likely to have been somewhat less pronounced than implied by the official data.

GDP growth is projected to be broadly in line with Bank staff’s estimate of underlying momentum in the economy in 2024 H2, of around ¼% per quarter. The latest indications from business surveys currently point to growth of around this rate. And three-month on three-month GDP growth rates were 0.3% and 0.2% respectively in July and August 2024. The economy’s supply potential is judged to be growing at a broadly similar rate.

There are some downside risks to the near-term outlook. Contacts of the Bank’s Agents report that, while the August Bank Rate reduction and anticipated further cuts in interest rates are continuing to improve business sentiment, expectations for activity have weakened slightly since the August Report. Some other indicators have also declined. The S&P Global/CIPS UK composite current output PMI weakened in October and was at its lowest level since November 2023. Reports from the Bank’s Agents’ contacts and survey measures of activity are likely to have been affected by temporary uncertainty ahead of Autumn Budget 2024, however, and so may be less indicative of GDP growth than would be typical.

Chart 2.14: GDP growth was lower than implied by business surveys in 2023 but recovered in the first part of 2024

Three-month on three-month growth in GDP and quarterly GDP growth implied by business surveys ^(a)

• Sources: British Chambers of Commerce (BCC), CBI, Lloyds Business Barometer, ONS, S&P Global/CIPS and Bank calculations.
• (a) Bank staff’s indicator-based model of GDP uses mixed-data sampling (MIDAS) techniques (Daniell and Moreira (2023)).

Near-term GDP growth is expected to be underpinned by growth in household consumption and business investment. Government expenditure is also expected to support GDP growth.

Household consumption grew by 0.1% in 2024 Q2. And it is projected to grow by 0.3% in 2024 Q3 and Q4, similar to expectations at the time of the August Report. Consumption is expected to be supported by continued growth in household real incomes and a waning drag from higher interest rates. Retail sales volumes growth has picked up, growing by 1.9% in 2024 Q3. Having fallen in 2022, real household incomes have recovered as inflation has fallen, growing by 3.4% over the year to 2024 Q2 (Chart 2.15).

There is, however, significant uncertainty over the outlook for consumption. Some measures of consumer confidence have weakened slightly in recent months, and the GfK consumer confidence index for major purchases remains low, despite picking up since its trough at the end of 2022. This is reflected in reports from the Bank’s Agents, where consumer-facing contacts have, on average, reported less optimism about the economic outlook. But weak consumer sentiment may reflect temporary uncertainty prior to the Autumn Budget 2024 and could unwind. The outlook for household savings and consumption is discussed in further detail in Box E.

Chart 2.15: Real income growth has picked up as inflation has slowed

Contributions to four-quarter growth in real household disposable income ^(a)

• Sources: ONS and Bank calculations.
• (a) Income is the ONS measure of household disposable income. This is total household income, including labour income, pensions, investment and benefits, net of direct taxes. The contribution from prices is based on the consumption deflator. Data cover households and non-profit institutions serving households. Data are to 2024 Q2.

Business investment growth was relatively strong in 2024 H1. That strength is projected to continue, with quarterly growth of 1.3% in 2024 Q3 and 0.2% in 2024 Q4. Consistent with that, contacts of the Banks’ Agents report that, despite uncertainty around the economic outlook, investment intentions have improved since August. Some contacts have highlighted strength in labour costs as having incentivised additional investment. In addition, lower current and expected future interest rates will be incentivising additional investment as financing costs fall.

Housing investment growth has been volatile so far in 2024, rising by 4.7% in 2024 Q1 before falling back by 2.1% in Q2. Housing investment has historically been sensitive to interest rates. As discussed in Box C of the August 2024 Report, as the effects of higher interest rates on house prices continue to wane, and housing activity continues to pick up, housing investment is expected to strengthen. In the near term, housing investment is projected to fall by 2.1% in 2024 Q3 before growing by 0.8% in 2024 Q4.

Central government spending has pushed up GDP growth in Q1 and Q2. Government spending so far in 2024–25 has been higher than the OBR’s March projections, partly reflecting the impact of additional in-year spending pressures. Measures announced at Autumn Budget 2024 are expected to boost GDP over the MPC’s forecast period as additional investment and current departmental spending more than offset announced net tax rises (Box B).

2.4: The labour market and slack

Bank staff estimates suggest that employment growth has remained modest.

The ONS Labour Force Survey (LFS) estimate of employment increased by 0.3% in 2024 Q2. The LFS measure has been particularly volatile over recent quarters, however, reflecting significant challenges with the survey collection: the achieved sample size in the LFS remains historically low and there is material uncertainty around any estimates (Box D May 2024 Monetary Policy Report). An alternative measure based on a broader range of employment indicators (including the HMRC RTI payrolls employee data, business surveys and the Bank’s Agents’ employment score) points to slow but positive employment growth of 0.2% in 2024 Q2 (Chart 2.16). This model estimate has been broadly stable over recent quarters and points to a similar rate of growth continuing in the near term.

Chart 2.16: Employment growth is estimated to have been stable

Quarterly employment growth ^(a)

• Sources: Bank of England Agents, HM Revenue and Customs, KPMG/REC/S&P Global UK Report on Jobs, Lloyds Business Barometer, ONS, S&P Global/CIPS and Bank calculations.
• (a) Bank staff’s indicator-based model of near-term employment growth use mixed-data sampling (MIDAS) techniques (Daniell and Moreira (2023)). Latest data are to 2024 Q2 and the diamond shows Bank staff’s projection for 2024 Q3.

The Labour Force Survey (LFS) suggests that the economic activity rate has fallen since the pandemic, but there is uncertainty around this estimate.

The share of adults aged 16–64 who are economically active, meaning that they have a paid job or are actively looking for one, fell from 79.2% in 2019 Q4 to 78.2% in the three months to August 2024, according to the LFS. There is uncertainty over the drivers of this fall in the economic activity rate, but the largest contributor to the fall appears to have been a rise in the share of working-age adults reporting that they are not in the labour force primarily due to sickness (Chart 2.17). These data are particularly uncertain given the challenges with the LFS noted above and because the ONS has not provided consistent historic estimates for these series after it reweighted estimates from September 2022 onwards. Overall, despite the economic activity rate seeming to be lower than prior to the pandemic, there has been relatively little change over the past two years.

Chart 2.17: Increasing levels of reported sickness since the pandemic have driven a fall in the economic activity rate, based on LFS estimates

Contribution to change in economic activity rate since 2019 Q4, by main reason for economic inactivity ^(a)

• Sources: ONS and Bank calculations.
• (a) Changes are shown from the three months to December 2019 and are based on those aged 16–64. Other reasons include: discouraged workers; those awaiting the results of a job application; have not yet started looking for work; do not need or want employment; have given an uncategorised reason; or have not given a reason. Sickness includes both those long-term and temporarily sick. The LFS was reweighted from September 2022. Prior estimates of the number of people outside the labour force by main reason were not adjusted leading to a structural break in the series. To provide a consistent estimate over this period, the contributions to the activity rate prior to the reweighting are calculated based on the relative shares of each group scaled to match the overall (reweighted) change in the activity rate. The final data points are the three months to August 2024.

Revisions by the ONS to its estimates of the size of the UK population mean that current LFS estimates of employment, and consequently the number of economically active individuals, are likely to be too low. The UK population is estimated to have grown faster than the measure of population used in the current LFS, partly as a result of higher net migration. The ONS plans to account for these larger population estimates in December 2024 (ONS (2024)). While the levels of employment and economic activity are expected to be revised up, Bank staff estimates suggest that the corresponding rates of employment and economic activity are likely to be revised down slightly.

The unemployment rate is judged to have been little changed over 2024.

The latest LFS data suggest that the unemployment rate was 4.0% in the three months to August. A model drawing on non-LFS indicators of unemployment, which includes the claimant count and the Agents’ score for recruitment difficulties, suggests that the underlying unemployment rate – the rate of unemployment abstracting from data noise in the LFS – has been broadly flat over the last few quarters, although there are uncertainties around this estimate (Chart 2.18). The ONS measure of redundancies has also remained low.

Looking ahead, the unemployment rate is projected to be a little over 4% in coming quarters before rising slightly further out (Section 1).

Chart 2.18: The unemployment rate has stayed fairly constant over recent quarters

Quarterly change in the unemployment rate ^(a)

• Sources: Bank of England Agents, Google Trends, IHS Markit, KPMG/REC UK Report on Jobs, ONS and Bank calculations.
• (a) Bank staff’s indicator-based models of near-term unemployment use mixed-data sampling (MIDAS) techniques (Daniell and Moreira (2023)). Latest data are to 2024 Q2 and the diamond shows Bank staff’s projection for 2024 Q3.

The labour market has continued to ease but appears relatively tight by historical standards.

A key measure of labour market tightness is the ratio of job vacancies to the number of people unemployed: when it is high there are few unemployed people available to fill any given vacancy, which can lead to upward pressure on wage growth as businesses compete to hire workers (Section 2.5). The vacancies to unemployment ratio has fallen moderately since the start of 2024 and is now in line with its 2019 level, although that was somewhat tighter than in the past (Chart 2.19). The pace of easing appears to have slowed somewhat, in part as the decline in vacancies has slowed: in mid-2023, the number of vacancies had fallen by more than 20% compared with a year earlier; that compares with a fall of 14% in the year to September 2024.

Alternative measures are also consistent with a continued easing in the labour market. The Bank’s Agents’ measure of recruitment difficulty has fallen back to levels last seen in 2017. And 6.4% of firms responding to the Business Insights and Conditions Survey reported experiencing difficulties in recruiting staff in September 2024, down from around 13% in mid-2022.

Chart 2.19: Tightness in the labour market continues to ease, although at a slower pace than in 2023

Vacancies to unemployment ratio ^(a)

• Sources: ONS and Bank calculations.
• (a) Comparisons in the vacancies to unemployment ratio over long periods are uncertain because, for example, the falling average cost of posting a job vacancy may have affected the number of vacancies posted for a given level of labour market tightness. The series is shown relative to the 2002 to 2024 Q2 average. The final data point is the three months to August 2024.

Some measures of labour market tightness have eased by less. The proportion of people who want more hours in their current job, which would be expected to be low if the labour market is tight, was estimated to have been 5.7% on a seasonally-adjusted basis in 2024 Q2, only slightly higher than its average rate of 5.5% in 2022 and well below typical levels in the 2010s (Chart 2.20). Relatively large movements over recent quarters may reflect volatility due to the low sample sizes in the current LFS. More broadly, average hours worked by full time workers has mostly recovered from the pandemic period. However, at an average of 36.6 hours per week, it remains lower than at any point during the 2010s.

Chart 2.20: The share of workers wanting to work more hours in their current jobs remains low

Percentage of workers reporting wanting to work more hours in their existing job ^(a)

• Sources: ONS and Bank calculations.
• (a) The final data point is 2024 Q2.

Spare capacity within firms appears to be close to historical averages.

Measures of capacity utilisation can indicate the extent to which firms are able to expand output without generating additional inflationary pressures. This partly captures additional available labour supply within firms, such as those wanting more hours. But it also captures underutilised capital such as additional machines or office space, which can be used to expand output at a low marginal cost. Survey measures of capacity utilisation suggest that, while firms were operating above their normal levels of capacity immediately following the pandemic, capacity utilisation has since returned to around historical average (Chart 2.21). These measures have been little changed since the start of 2024.

Chart 2.21: Measures of capacity utilisation are close to their average levels over the past

Survey indicators of capacity utilisation ^(a)

• Sources: Bank of England Agents, British Chambers of Commerce (BCC), CBI, S&P Global/CIPS, ONS and Bank calculations.
• (a) Standard deviations from averages between 2000–19. The measures included in the swathe are from the Bank’s Agents, the BCC (non-services and services), the CBI (manufacturing (capacity); financial services, business/consumer/professional services and distributive trade (business relative to normal)) and CIPS (manufacturing (backlogs); services (outstanding business)). Sectors are weighted using shares in gross value added. The BCC data are not seasonally adjusted. The data are shown to 2024 Q3.

Aggregate demand and supply are judged to be broadly in balance.

The MPC judges that aggregate supply and demand remain broadly in balance. The margin of economic slack is judged to be slightly smaller than assumed at the time of the August Report, at around zero (Section 1). That is consistent with half of the upward revision to GDP in Blue Book 2024 having reflected additional excess demand. The MPC tends to revise its judgement on the level of economic slack over time as data are released and revised. A fuller assessment of the supply capacity of the economy will be conducted as part of the MPC’s next stocktake. The MPC judges that aggregate demand and supply will remain balanced in the near term, before a degree of slack opens up in the second half of the forecast period (Section 1).

2.5: Inflation and wages

Consumer price inflation was slightly below the MPC’s 2% target in September.

Twelve-month CPI inflation fell to 1.7% in September, from 2.2% in July and August (Chart 2.22). That was 0.4 percentage points below the August Report projection, accounted for by lower-than-expected prices of fuel, accommodation and airfares. Since the start of the year, the fall in headline CPI inflation has largely reflected lower core goods and food price inflation. Services inflation has declined to a lesser degree, from 6.5% in January to 4.9% in the latest data.

Core CPI inflation, which excludes energy, food, beverages and tobacco, was 3.2% in September, down from 3.5% in June and much lower than its level of 5.1% at the start of the year.

Chart 2.22: CPI inflation fell to 1.7% in September, but it is expected to rise again before the end of the year

Contributions to CPI inflation ^(a)

• Sources: Bloomberg Finance L.P., Department for Energy Security and Net Zero, ONS and Bank calculations.
• (a) Figures in parentheses are CPI basket weights in 2024. Data to September 2024. Component-level Bank staff projections from October 2024 to March 2025. The food component is defined as food and non-alcoholic beverages. Fuels and lubricants estimates use Department for Energy Security and Net Zero petrol price data for October 2024 and are then based on the sterling oil futures curve.

Inflation is projected to rise above the 2% target in the final quarter of 2024.

Headline CPI inflation is projected to rise to 2.5% around the turn of the year. Reductions in the Ofgem price cap in 2023 Q3 and Q4 mean that utilities prices have been weighing on headline CPI inflation. As those reductions drop out of the annual comparison, CPI inflation is expected to rise somewhat. Additionally, the increase in the Ofgem price cap for the typical household from £1,568 in July to £1,717 in October of this year will add an estimated 0.3 percentage points to CPI inflation in 2024 Q4.

The near-term path for CPI inflation is 0.4 percentage points lower than expected in the August Report. The recent fall in sterling oil prices and the resulting path for fuel prices accounts for 0.3 percentage points of the downward revision, with a further 0.3 percentage points accounted for by a lower expected contribution from services inflation. This is partially offset by small upside news spread among the food, core goods and utilities components.

Taken together, the policies announced at Autumn Budget 2024 are expected to add just under 0.2 percentage points to the projection for annual CPI inflation in 2025 Q1. This is accounted for by the rise in the cap on bus fares and introduction of VAT on private school fees (see below), which push inflation up from January. The effects of the Budget on inflation in the medium term are discussed further in Section 1 and Box B.

Core goods inflation has been subdued but is expected to return to its pre-Covid average in coming months.

Annual core goods CPI inflation was 0.2% in September, below its pre-Covid average and slightly above expectations in the August Report. Core goods inflation has fallen materially over the past 18 months, driven by declines in the prices of energy and other imported goods as previous global shocks have unwound.

Bank staff expect core goods inflation to return to around its pre-Covid average over the coming months (Chart 2.23). Indicators of input cost pressures generally remain muted. PPI input prices have been flat in recent months, and although the PMI manufacturing input price index had been around its historical average since the summer, the October release recorded a sharp decline, likely reflecting the fall in oil prices. Global export price inflation, a key driver of goods prices in the UK (see Box D), has fallen back since its peak in 2022 and is expected to be subdued in coming quarters, although there are risks in both directions (Section 2.1).

Food price inflation has also declined significantly, to 1.9% in September from a peak of 19.1% in March 2023, owing to lower energy and agricultural commodities prices. Bank staff expect annual food price inflation to average 1.1% across the coming six months, below its pre-Covid average.

Chart 2.23: Services inflation remains elevated relative to its pre-Covid average

Annual inflation rates for components of CPI ^(a)

• Sources: ONS and Bank calculations.
• (a) The core goods component is defined as goods excluding food and non-alcoholic beverages, alcohol, tobacco and energy. Data are to September 2024. Bank staff projections from October 2024 to March 2025. Dashed lines represent 2010–19 averages which are 3.0% and 0.8% for services and core goods respectively.

Services price inflation has fallen gradually over 2024 but remains elevated.

Services consumer price inflation was 4.9% in September, 0.6 percentage points below the August Report projection. Most of the downside news reflected lower-than-expected inflation in volatile components, including accommodation and airfares, and higher-frequency measures have been more stable. Staff expect a small amount of the volatility in services inflation to unwind in coming months. More generally, annual services inflation has crept down over the course of 2024 but remains elevated.

Higher-frequency measures of services price inflation, which can be indicative of near-term inflation momentum, have moved lower in the most recent data but have tended to remain elevated. There are a range of approaches to assessing near-term momentum in services prices, and Chart 2.24 presents three alternative measures in addition to the headline series. The orange line, which excludes some of the most volatile components of services inflation, has remained at, or just below, the bottom of its range observed since mid-2023. A ‘low variance’ measure of services inflation (aqua line), which dynamically reduces the weights of the most volatile components of the CPI basket, has fallen a little lower, but by less than the headline services measure. A similar picture is observed for the trimmed mean inflation measure (purple line), which removes some of the largest and smallest price changes. All of these measures point to a three-month average of monthly annualised services inflation of around 4.6% in September, higher than the 2.9% annualised rate implied by the headline services measure.

Chart 2.24: Part of the fall in higher-frequency services price inflation reflects volatility

Measures of higher-frequency services price inflation ^(a)

• Sources: ONS and Bank calculations.
• (a) Measures shown are three-month averages of seasonally adjusted monthly annualised inflation. The low variance measure is calculated by weighting each component of services inflation by the inverse variance of the change in 12-month inflation of that component from 12 months previously. The maximum adjusted weight is capped at twice its original value. Details on the components which have been included/excluded from the ‘Services excluding indexed and volatile components, rents and foreign holidays’ measure are included in the accompanying spreadsheet published online. The trimmed mean measure excludes the 10% largest and 10% smallest price changes. The latest data points shown refer to September 2024.

Elevated inflationary pressures also remain evident in the frequency of price changes among services. The proportion of services prices rising in each month has been higher than its pre-pandemic average since 2022, although it has fallen from its peak in 2023 (Chart 2.25). The frequency of price changes – rather than the magnitude of each price change – tends to be the primary driver of the overall inflation rate, particularly in high inflation episodes (Nakamura et al (2018)). Looking ahead, consumer-facing services respondents in the DMP Survey expect the share of prices that change each month to remain elevated next year, similar to the rates seen in 2023–24, and still much higher than those seen in 2019.

Chart 2.25: The share of prices being increased each month has risen sharply since 2022

Share of monthly CPI services price quotes that show price increases or decreases, total services and excluding catering and accommodation ^(a)

• Sources: ONS and Bank calculations.
• (a) Chart shows a rolling 12-month average. Catering and accommodation services are excluded from the dashed lines as these have been more affected by recent external cost shocks – for example elevated food price inflation – than other types of services. The latest data points refer to September 2024.

Waning non-labour cost pressures have driven services inflation lower, but labour costs remain elevated.

The fall in services inflation from its recent peak has largely been driven by easing non-labour cost pressures. Consistent with that, the share of respondents to the ONS Business Insights and Conditions Survey (BICS) citing non-wage costs as the cause of price rises has declined since mid-2022, while the share citing labour costs as being important has been broadly stable. Consumer-facing services contacts of the Bank’s Agents cite wage pressures as a key factor affecting pricing decisions.

The extent to which firms pass higher labour costs into prices will be an important determinant of the outlook for services inflation.

While the evidence is mixed, firms appear not to have fully passed cost increases into prices in recent years. Respondents to the DMP Survey reported falling and flat profit margins in 2022 and 2023, respectively. National Accounts data suggest that the profit share of income has fallen slightly relative to pre-pandemic levels (Chart 2.26), and the labour share of income has risen a little. Taken together, these data are broadly consistent with reports from the Bank’s Agents that margins are compressed.

Margins compression appears to have caused increased cash-flow constraints for a subset of small-sized firms. Responses to the BICS point to some deterioration in cash reserves for small-sized firms over 2024, with around 40% of respondents now holding cash reserves sufficient to cover less than four months’ expenses, compared with around 35% in 2023. There is less evidence of a deterioration in cash flow for medium and large-sized firms. There is a risk that cash-flow constraints translate into reduced employment for those firms affected, particularly if labour costs remain elevated. Staff analysis of the BICS responses, for example, suggests that having lower cash reserves in a given month increases firms’ expectations of having to reduce headcount the following month.

Chart 2.26: The profit share of income has fallen slightly in recent years

Private sector profit share, four quarter moving average ^(a)

• Sources: ONS and Bank calculations.
• (a) The private sector profit share is calculated as the private sector gross operating surplus (private sector non-financial corporations and financial corporations excluding the alignment adjustment) divided by private sector gross operating surplus plus compensation of employees. Data are to 2024 Q2.

The extent to which firms pass higher labour costs, including those associated with the higher rate of employer National Insurance contributions (NICs) announced at the Budget, into prices in coming quarters will depend in part on the strength of demand in the economy as well as the competitive pressures they face. At present, the scope for such pass-through appears to be limited. The Bank’s Agents’ intelligence suggests that firms in consumer-facing industries face difficulties in passing through costs given subdued demand. And while firms responding to the DMP Survey expected some margin expansion in coming quarters, firms in sectors with the largest weights in consumption, including retail, accommodation and food services, expected only modest increases. Large corporates responding to the 2024 Q3 Deloitte CFO survey on balance expected margins to remain broadly unchanged over the coming 12 months.

Services price inflation is projected to remain above its pre-Covid average in the near term.

Annual services price inflation is expected to be broadly stable over the coming six months at above its pre-Covid average level, averaging 4.9% (Chart 2.23). Within that, the expected impact of introducing VAT on private school fees raises the contribution of education to overall services inflation by 0.2 percentage points from January 2025. In addition, the announced increase in the cap on single bus fares from £2 to £3 is expected to add around 0.1 percentage points to services inflation from January (Box B).

Beyond the next six months, consumer-facing service sector respondents to the October DMP Survey expected their own price inflation to fall by around 1 percentage point, to just over 4% over the year ahead (Chart 2.27). Those expectations have stabilised in recent months and are somewhat higher than the average of responses between 2018 and 2019. Box A outlines risks in both directions to the outlook for inflation.

Chart 2.27: Firms responding to the DMP Survey expect further declines in services price inflation

Annual consumer service price inflation, realised and expected ^(a)

• Sources: DMP Survey and Bank calculations.
• (a) Data are three-month averages and the final realised data point is October 2024. The diamonds show expectations for the year ahead from successive survey waves.

Inflation expectations have largely returned to historical averages.

Household and business expectations for CPI inflation play an important role in wage and price-setting dynamics. Inflation expectations rose sharply alongside actual inflation in 2022. With inflation now around the 2% target, however, some measures of inflation expectations are back to around their 2010–19 averages.

Inflation expectations, as measured by the Bank/Ipsos survey, were a little below their pre-Covid averages at the one and five-year horizons in 2024 Q3. The short and medium-term inflation expectations measures reported in the Citi/YouGov survey have picked up somewhat since August but remain lower than recent peaks (Chart 2.28). Part of that rise may have reflected the October increase in the Ofgem price cap. Households’ perceptions of current inflation reported in the Bank/Ipsos survey remained elevated at around 5.2% in 2024 Q3. The current gap between households’ perceptions of inflation and CPI inflation outturns is relatively large by historical standards.

Firms’ short and medium-term expectations for inflation have also fallen back from their peaks in 2022. Firms responding to the October DMP Survey expected inflation at a one-year horizon to be 2.7%, down from 3.4% at the start of the year (Chart 2.28). Firms’ three-year CPI expectations have been stable since January at around 2.7%. The Deloitte CFO survey measure of two-year CPI expectations was 2.3% in Q3, slightly higher than the 2.1% figure reported in Q2.

Chart 2.28: Inflation expectations have largely normalised, although some measures have ticked up in recent months

Survey-based measures of household ^(a) and business ^(b) inflation expectations

• Sources: Citigroup, DMP Survey, YouGov and Bank calculations.
• (a) Data shown are the 1-year and 5–10-year inflation expectations measure from Citi. Dashed lines represent the series averages over 2010–19. The latest data points are for October 2024.
• (b) Data shown are from the DMP Survey and are based on three-month averages of responses to the question: ‘What do you think the annual CPI inflation rate will be in the UK, one year from now and three years from now?’. The latest data points are for October 2024.

Wage growth has eased further but remains elevated.

Wage growth is the most important factor behind the remaining persistence in services inflation. Annual growth in private sector regular AWE eased to 4.8% in the three months to August, down from a peak of just above 8% in mid-2023 and in line with the projection at the time of the August Report. The normalisation in inflation expectations and easing in labour market tightness have supported that moderation in pay growth.

Consistent with the slowing in the official measure of pay growth, Bank staff’s indicator model of underlying pay growth – based on a statistical combination of signals from a range of pay indicators – has also declined in recent quarters and points to underlying wage growth of around 4.9% in 2024 Q3 (left panel of Chart 2.29). Within that, the Indeed Wage Tracker (purple line in right panel), which measures the average annual change in wages stated on job adverts, pointed to higher pay growth of around 6.8% in the year to September. Meanwhile, the KPMG/REC UK Report on Jobs measure, which measures monthly changes in wages for new permanent hires, has been pointing to pay growth below the official measure in recent months, of around 3% in the three months to September. The correlation between the REC measure and the official data appears to have weakened in recent years, however.

Chart 2.29: Most indicators of wage growth have moderated in recent quarters

Measures of annual private sector wage growth ^{(a) (b)}

• Sources: HMRC, Indeed, KPMG/REC UK Report on Jobs, ONS and Bank calculations.
• (a) Series shown in the left-hand panel are at a quarterly frequency. Bank staff’s indicator-based model of near-term private sector regular pay growth uses mixed-data sampling (or MIDAS) techniques. A range of indicators inform the model, including series from the Bank of England Agents, the Lloyds Business Barometer, Indeed, ONS/HMRC PAYE payrolls and the KPMG/REC UK Report on Jobs. Indicators are weighted together according to their relative forecast performance in the recent past. Private sector regular pay growth is the ONS measure of private sector regular average weekly earnings growth (quarter on same quarter a year ago). Latest data points are for 2024 Q2, with diamonds showing projections for private sector regular pay growth for 2024 Q3–2025 Q4.
• (b) Series shown in the right-hand panel are at a monthly frequency. Definitions of wage growth vary between each of the measures. Private sector regular pay growth is the ONS measure of private sector regular average weekly earnings growth (three-month average on same three-month average a year ago). KPMG/REC shows average starting salaries for permanent staff compared to the previous month. HMRC Real-Time Information (RTI) shows median of private sector employee pay growth. Indeed shows annual average job title matched pay growth for UK job vacancies. The KPMG/REC index is mean-variance adjusted to ONS private sector regular pay growth over 2002–19 and is advanced by 12 months, which better reflects the leading relationship between the KPMG/REC index and the ONS measure of pay growth. Latest data points are September 2024 for Indeed, HMRC RTI and the KPMG/REC index, and the three months to August 2024 for private sector regular pay.

Elevated inflation expectations and labour market tightness have played an important role in recent strength in wage growth.

There are many different models that can be used to quantify the determinants of wage growth, and a high degree of uncertainty around what these imply. In particular, models estimated on pre-Covid data alone have struggled to account for the recent strength in wage growth. It is difficult to disentangle whether the poor explanatory performance of these models stems from the size of the recent inflation shock, or if features of the wage-setting process have also changed.

One such model used by the MPC in recent years, based on Yellen (2017), is shown in Chart 2.30. Relative to previously shown versions of this decomposition, for example Chart 2.22 in the August Report, this version has been re-estimated on more recent data and allows for longer lags between inflation expectations and wage growth. This improves the fit over recent years and suggests that wage growth since 2021 can largely be explained by the rise in inflation expectations and tightness in the labour market. Though this represents only one interpretation of recent wage dynamics, results from the model suggest that the ongoing easing in the labour market and normalisation of inflation expectations will moderate wage growth in coming quarters, albeit fairly slowly.

Chart 2.30: Falling inflation expectations and a looser labour market have contributed to lower wage growth

Contributions to annual private sector regular pay growth ^(a)

• Sources: Barclays, Citigroup, ONS, YouGov and Bank calculations.
• (a) Wage equation based on Yellen (2017). Pay growth is Bank staff’s estimate of underlying pay growth between January 2020 and March 2022 and the ONS measure of private sector regular AWE growth otherwise. Short-term inflation expectations are based on the Barclays Basix Index and the YouGov/Citigroup one year ahead measure of household inflation expectations and projected forward based on a Bayesian VAR estimation. Slack is based on the MPC’s estimates, informed by the vacancies to unemployment ratio. Productivity growth is based on long-run market sector productivity growth per head. The final data point is 2024 Q2.

The National Living Wage is providing a small boost to annual wage growth…

The National Living Wage (NLW), which increased by nearly 10% in April of this year, appears to be boosting aggregate wages in line with Bank staff’s estimates for a total impact of around 0.3 percentage points. HMRC RTI data suggest that – based on the difference in growth between median pay and that in the lower quartile – a little less than that effect has materialised so far. There remains some uncertainty around the extent of indirect spillover effects further up the pay distribution.

Alongside the Autumn Budget, the Government announced that it had accepted the recommendation of the Low Pay Commission regarding the 2025 NLW uplift. This means that the NLW will increase by 6.7% from April 2025, to maintain the NLW at two thirds of median earnings (Box B). This is slightly higher than the rate anticipated by the majority of contacts in the Bank’s Agents’ network of 5%–6%, but significantly lower than last year’s increase. It is expected to provide a small boost to aggregate annual wage growth.

…and public sector pay settlements, when enacted, are also expected to raise whole economy pay growth.

Increases in public sector pay, announced in July, are expected to provide a small boost to economy-wide pay growth in coming quarters. Over the summer the Government accepted the recommendations of several public sector pay review bodies including those for the NHS, teachers, police, and the armed forces. The public sector represents around one fifth of total UK employment and the announced increases are expected to raise whole economy average weekly earnings by around 0.5 percentage points once these pay deals are fully implemented. The timing of implementation remains uncertain and will depend on the pay processes within individual public sector bodies. Given the historical relationship between public and private sector pay, the effect on private sector regular AWE appears likely to be limited.

The increase in employer NICs announced at Autumn Budget 2024 is expected to have a small downward effect on wages over the MPC’s forecast horizon, but there is uncertainty over the size and timing of this effect (Section 1).

Annual private sector pay growth is projected to rise slightly in the final quarter of this year…

In the MPC’s November projections, annual private sector pay growth is projected to rise slightly in the final quarter of this year, as the effect of relatively weak pay growth in October 2023 enters the annual comparison. Measured at a higher frequency, three-month on three-month annualised private sector wage growth is projected to slow to 3.6% in Q4.

…but to fall back subsequently as lower inflation expectations and a looser labour market feed through to lower pay settlements.

Annual private sector wage growth in the MPC’s baseline projection is expected to slow to just over 3.2% by the end of 2025, as past falls in inflation expectations and the easing in the labour market feed through to lower wage growth.

There are risks around the outlook for wage growth in both directions (Box A). While contacts of the Bank’s Agents expect pay awards in 2025 to return to around 2%–4%, from 6%–6.5% in 2023 (Box F), firms’ year-ahead expectations for wage growth reported in the DMP Survey have stabilised at a higher level of around 4% (Chart 2.31). Within that, those in the consumer-facing services sector expect wage growth in the region of 4¾%, while those producing goods expect pay growth closer to 3¾%. Responses to the REC survey, by contrast, point to private sector pay growth closer to 2% by late 2025. Recent measures announced at Autumn Budget 2024 – including the rise in employer NICs – may also affect wage growth (Section 1.2).

Chart 2.31: DMP Survey respondents expect wage growth to decline, but those expectations appear to have stabilised at elevated levels

Realised annual wage growth and 12-month ahead expectations ^(a)

• Sources: DMP Survey and Bank calculations.
• (a) The final data point for realised wage growth is October 2024. The diamonds show expectations for wage growth one year ahead.