Reeves' Price Cut Power
On Wednesday, the UK Chancellor, Rachel Reeves, has the unenviable task of delivering a budget that achieves fiscal stability while actively reducing the official inflation forecast provided by the Office for Budget Responsibility (OBR). This challenge is framed by the political reality that the economy "feels stuck" for too many and that rising prices "hit ordinary families most." As Ms. Reeves wrote in The Sunday Times, "Delivering on our promise to make people better off is not possible if we don't get a grip on inflation," adding that it is "a fundamental precursor to economic growth. It is essential to make families better off and for businesses to thrive."
The Chancellor has two principal routes to lower inflation: first, by announcing measures that directly weigh on consumer prices within the CPI basket, and second, by heavily front-loading the fiscal adjustment to dampen aggregate demand. Given the urgent political pressure, the former approach, direct intervention, is seen as the most likely and impactful strategy. Ms. Reeves emphasised, "There is an urgent need to ease the pressure on households now. It will require direct action by this government to get inflation under control."
This direct intervention could lead to the BoE’s headline inflation forecast easing by 0.4% from April of next year. Measures being considered include freezing regulated rail fares, abolishing the reduced 5% VAT rate on domestic energy bills from April 2026, and another annual freeze on fuel duty. The combined effect of these steps is estimated to lower annual CPI by 0.4% in the second quarter of 2026 (2Q26), reducing the forecast to 2.5% compared to the BOE's current 2.9% projection.
Despite the focus on relief, the Chancellor is simultaneously expected to raise taxes when she sets out economic policies on 26 November as she seeks to bridge a multibillion-pound gap in her spending plans. While immediate, heavy fiscal tightening to directly impact demand is seen as less likely, the budget must still signal a credible plan.
Beyond these potential price-cutting policies, the government may also address long-term structural issues that plague the economy. Ms. Reeves indicated that reforms would change the welfare system from "trapping millions of people on benefits" to one "designed to help people succeed," suggesting a focus on increasing the workforce and national productivity. These supply-side efforts, if judged credible by the OBR, could help lower future cost pressures by boosting the economy's capacity to grow without generating inflation. Ultimately, by combining immediate cost reduction designed to tame the headline CPI figure with pledges for long-term growth and responsible fiscal management, the Chancellor aims to create the necessary conditions to help the BoE achieve its 2% inflation target. Not a tall ask!
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