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Blow to British standard of living placed firmly at Labour’s door | UK | News

amedpostBy amedpostAugust 8, 2025 News No Comments4 Mins Read
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Living standards are expected to stagnate for at least a year under Labour, the Bank of England has warned, as concerns mount over further tax rises and soaring prices.

Threadneedle Street pointed the finger at Chancellor Rachel Reeves’s record tax raid last autumn, combined with rising food costs driven by government policy, for putting renewed pressure on working people, reports The Telegraph.

The Bank cautioned that the cost of the weekly shop would continue to climb throughout the year in what it described as a “challenging constellation” of weak pay growth and stubbornly high inflation.

While benefits claimants and pensioners will be largely shielded thanks to welfare payments being raised in line with inflation, working people are set to bear the brunt. This comes as a blow to Sir Keir Starmer’s pledge to boost living standards during this parliament.

Zero income growth 

Governor Andrew Bailey revealed that wage growth is slowing more rapidly than anticipated, with forecasts now showing zero growth in real post-tax incomes next year.

In a further blow, the Bank raised its inflation forecasts for the next three years and warned that inflation would not return to target until 2027.

The bleak outlook was delivered as the Bank cut interest rates from 4.25 percent to 4 percent on Thursday and gave its latest economic assessment. The decision was exceptionally close, with a rare three-way split among members of the Monetary Policy Committee (MPC). For the first time since gaining independence in 1997, Governor Bailey had to direct policymakers to vote twice.

Policymakers were divided amid signs that inflation is picking up just as economic growth falters. The Bank said faster-than-expected rises in food prices would push overall inflation to a peak of 4 percent in September—double its official target.

Government policy hikes prices

Officials blamed supermarket price hikes on government policy, citing higher minimum wage, last autumn’s tax raid by the Chancellor and a net zero packaging levy.

In response to the Bank’s third interest rate cut this year, Ms Reeves insisted Labour was investing in the economy to “drive up wages and improve living standards across the UK”.

But a survey by the Bank suggested her inheritance tax raid and Labour’s plans for workers’ rights were having a chilling effect on business investment.

Sir Mel Stride, shadow chancellor, said: “Interest rates should be falling faster, but Labour’s Jobs Tax and reckless borrowing have pushed inflation well above target.”

Fears are growing of another tax raid this autumn. Economists warn Ms Reeves faces a £50bn black hole in public finances as she tries to balance the books.

Mr Bailey said the UK economy remained “subdued” but warned against cutting interest rates too quickly or by too much for fear of letting inflation spiral out of control.

He said: “On the one hand you’ve got slightly higher inflation, on the other you’ve got a slightly weaker activity profile.”

Taxes on jobs

Officials revealed that steep increases in minimum wage and the Chancellor’s £25bn National Insurance raid have already added between 1 and 2 percent to food prices, with more increases expected next year.

The British Retail Consortium has warned food inflation could reach 6 percent by year-end.

In another setback for Ms Reeves’s hopes of further cuts to borrowing costs, Mr Bailey said future rate cuts would need to be made gradually and carefully. “We’ve cut interest rates today, but it was a finely balanced decision. Interest rates are still on a downward path, but any future rate cuts will need to be made gradually and carefully,” he said.

The value of the pound rose against the dollar after the decision, while investors are no longer fully pricing in another rate cut this year. Mortgage costs could also rise in coming days after swap rates jumped.

Britain gripped by ‘stagflation’

Three former MPC members warned Britain is now gripped by “stagflation”—stagnant growth combined with high inflation. Willem Buiter said: “The UK can be said to have entered a stagflationary episode.” Andrew Sentance added: “It is quite appropriate to use the word stagflation.” Jonathan Haskel said he would not have cut rates at all. “It is a pretty grim outlook,” he commented. “Activity is flat, and inflation is above target. It is hard to be optimistic.”

Sources close to Ms Reeves insisted she remains on the side of working people, pointing out: “We froze fuel duty, increased minimum wage, didn’t increase National Insurance, VAT or income tax, boosted pay for nurses, armed forces and police, rolled out breakfast clubs for primary school kids, and since the election we have seen five interest cuts.”

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