Inflation will hit 5% in autumn says ex-Bank of England interest rate-setter (2025)

Economists are underestimating how high inflation will reach this year, according to a former member of the Bank of England Monetary Policy Committee (MPC).

Inflation dropped to 2.6 per cent in the reading released this morning – marginally lower than expected – but the Bank of England currently expects it will rise when the next reading is released in May, and hit a peak of 3.7 per cent in the autumn.

But Dr Andrew Sentance, who sat on the MPC – which sets interest rates – between 2006 and 2011 has said that Rachel Reeves‘s national insurance (NI) increase will have a bigger impact on price rises than is widely predicted.

Dr Sentance, who has also previously worked as a government adviser, believes inflation is likely to breach 5 per cent in the autumn.

And he said because of this, the Bank should avoid cutting rates next month, as it is expected to do.

Financial markets are currently expecting interest rates to be cut to 4.25 per cent in May, and if this turns out not to be the case, it would probably lead to mortgage rates increasing.

Speaking to The i Paper, Dr Sentance said: “The impact of NI rise is bigger than the Office for Budget Responsibility (OBR) and Bank of England are suggesting.

“My calculation is that for a worker on average wage, the NI rise adds about 2.5 per cent to the wage bill. Even though this will be cushioned by profit squeeze and job cuts, I think it implies a temporary rise of 0.7 to 0.8 per cent on the core inflation rate.”

He also outlined multiple other factors that he believes will cause inflation to rise, including public spending and borrowing increasing demand, high water prices, high energy prices and high private sector wage inflation.

“Private sector wage inflation of nearly 6 per cent is perpetuating and could increase the core inflation rate,” he said.

Figures released on Tuesday showed that annual growth in employees’ average earnings for regular earnings (excluding bonuses) was 5.9 per cent and total earnings (including bonuses) was 5.6 per cent.

Dr Sentance said that all the factors combined “creates a perfect storm for UK inflation” over the next six to nine months.

“With stock markets recovering the case for lower rates is not very persuasive with the upside inflation risks I have identified,” he said.

Inflation is currently set to rise when April’s figures are released next month, with most economists predicting it will jump to around 3.5 or 3.6 per cent, and then peak at 3.7 per cent in September.

Why Andrew Sentance thinks inflation will rise

Dr Andrew Sentance’s view that inflation will hit 5 per cent is based on seven points:

1) Core inflation is already 3.4 per cent

2) Private sector wage inflation of nearly 6 per cent is perpetuating and could increase the core inflation rate

3) Impact of NI rise is bigger than OBR and Bank of England suggest.

4) Higher energy prices will push headline inflation above the core rate for a while. “Energy prices are very difficult to predict but I am assuming they don’t come down significantly until next year,” he says.

5) Water bills went up 26 per cent in April.

6) Other utility prices going up above inflation, such as broadband and phone/TV subscriptions.

7) Public spending and borrowing increases adding to growth of demand.

Economists who have predicted smaller rises to inflation than Dr Sentance say there are upside risks to their forecast.

Paul Dales, chief UK economist at Capital Economics, has forecast that inflation will peak at 3.5 per cent in September.

He said: “I’d say the risks to inflation are two-sided at the moment. Upside risks from firms passing on higher NI and the rise in the minimum wage. Downside risks from the drag on activity and prices from US tariffs.”

He added: “While there are large risks on both sides, we’re sticking to our forecast that CPI [Consumer Prices Index] inflation will rise to 3.5 per cent in September before falling below 2 per cent in 2026.”

Rob Wood of Pantheon Macroeconomics is forecasting that inflation will peak at 3.7 per cent but added: “The minimum wage hike and payroll tax increases pose upside risks to inflation, with firms reporting in business surveys that they plan to raise prices a little faster in the next twelve months than over the past twelve.”

Others are also forecasting a lower peak.

Sanjay Raja of Deutsche Bank Research said: Inflation will take a big step up in April, pushing above 3.25 per cent year on year as energy and water bills lead inflation higher. The good news? We still see inflation running below the MPC’s forecast through the second quarter of the year. The peak in CPI will likely sit lower than we thought – closer to 3.5 per cent as opposed to 3.75 per cent.”

While on the MPC, Dr Sentance consistently argued that the Bank should increase interest rates from 0.5 per cent in the years after the 2008 financial crisis.

In 2010, inflation was consistently coming in at above 3 per cent, and so in every meeting from June that year until he left the MPC the following summer, he voted to increase rates to either 0.75 per cent or 1 per cent.

Most other members of the MPC at the time voted to maintain rates at 0.5 per cent, and they were not changed until they were reduced to 0.25 per cent in 2016 after the Brexit referendum.