What assessment has the Cabinet Secretary made of the benefits that inflation falling to 2.3 per cent will have on the Welsh economy?
The latest inflation figures published on 22 May show that annual consumer price inflation for April was 2.3 per cent. This is an improvement from just under two years ago, when inflation was above 11 per cent, the highest rate of price rises since the 1980s.
High inflation reduces investment as it makes it harder for businesses to plan and erodes the real value of people’s wages, incomes and savings. Whilst these effects have abated, the cost-of-living crisis remains as, while the rate at which prices increase has reduced, prices are still elevated. The price level is over 20 per cent higher than just three years ago and real wages are around the same as they were in 2010. This has negative implications for people’s living standards in Wales. Food and energy prices have also risen more than the general rate of inflation over recent years. As low-income households tend to have a larger share of their expenditure on these essential items, they will have been particularly negatively impacted by the rise in prices.
As the Bank of England’s remit is to provide price stability in the UK, aiming for a target of 2 per cent rate of inflation, its response has been to sharply raise interest rates. Therefore, as well as higher prices, households and businesses in Wales are also being affected by the highest interest rates for over 16 years. As the risk of higher inflation remains and has not abated as quickly as widely expected by markets, the expectations of an interest rate cut in the coming months has reduced, prolonging the period of higher interest rates and its negative effect on the economy.
The Welsh Government’s budget has also been negatively impacted. As a result of the inflation shock, the Welsh Government’s settlement in 2024-25 is worth up to £700m less in real terms than expected when it was first set at the 2021 spending review.
Therefore, whilst the reduction in the rate at which prices are increasing is welcome, households and businesses in Wales and the Welsh Government are all still suffering from the impacts of persistently higher prices and elevated interest rates.