The Macroeconomic Policy Outlook

In both the UK and the US, services expenditure has not recovered to the pre-pandemic paths, with services consumption down 5.6 per cent for the UK and 0.5 per cent for the US. [...] Colossal European energy prices are falling from their peak, but the risk of future price hikes remains uncertain Energy prices alone are directly contributing to almost one third of inflation in the UK (3.9 per cent in October 2022, as shown in Figure 1), starting in late 2021 and fuelled by the invasion of Ukraine in early 2022. [...] Much of Europe, including the UK, relies on gas for heating during the cold winter months (45 per cent of annual household gas use in the UK takes place in the first quarter of the year), and the UK relies on gas for 40 per cent of electricity generation, more than European peers. [...] But roughly half of the fall relative to the dollar is due to dollar strength, meaning only half is due to changes in the UK-specific risk premia, according to Bank of England MPC Member Catherine Mann. [...] And, although UK-specific pressures on the prices of tradable goods and services could offset some of the disinflationary pressure from the global fall in prices, this is likely to be relatively small.