Guernsey’s rate of inflation falls to 5.8%

Richard Hemans (pictured), IoD Guernsey’s lead on economics, commented: “The latest bulletin shows that local inflation is continuing to fall slowly, although it remains stubbornly high in line with the experience of other jurisdictions. The annual change in RPI for the year was 5.8%, which was 2.5% lower than March 2023 and 0.5% below December 2023. Inflation has been decreasing for five consecutive quarters now since it peaked at 8.5% in December 2022, but it is taking a long time to return to the levels last seen in early 2021 and before, which may not be achieved for some years.

“The first quarter of the year usually sees the highest increase in inflation, but the quarterly increase of 2.0% is the softest March reading since 2021 and core inflation, excluding food and energy, decreased to 4.9% from 5.3%. The island’s RPI is below Jersey’s rate of 7.5% for now, which is not published until Friday 24 April 2024, but remains higher than the UK’s, which was 4.3% at the end of March 2024.

“Housing continued to be the most significant contributor to annual inflation, whilst Leisure Services (entertainment, holidays etc.)  and Household Services (communications, cleaning etc) were also important factors. Housing costs increased by 10.9%, Leisure Services by 8.4% and Household Services by 6.6%, contributing 1.9%, 0.8% and 0.8% respectively, or 60% of the 5.8% RPI figures.

“The increase in housing inflation is being mainly driven by higher mortgage interest and rental payments. Pressure should therefore start to ease in this category in the second half of the year once the interest rate tightening cycle that ended in August 2023 is no longer reflected in the figures. Several interest rate reductions are expected in the UK later this year, although this will very much depend on further falls in inflation. The strength in services inflation suggests there is significant domestic inflationary pressure, most of which is caused by the shortage of labour and a relatively strong economy.

“There is an interesting table in the bulletin that shows local prices have increased cumulatively by a staggering 21% over the last three years, which compares with 15% over the seven years before that. Inflation has caused significant economic pain in this period. However, there was some good news in the report that showed Food prices have stabilised over the last quarter, recording no increase over the first three months of 2024 and a relatively small increase of 3.9% over the last year.

“The most recent States of Guernsey forecast indicates that inflation will fall below 5% by the end of December 2024, which seems realistic given today’s figures, but remains very high and underlines how slowly inflation is falling. The March 2024 forecast was 5.9%, which gives some credibility to the forecast.

“Inflation in Guernsey and Jersey is more acute than other developed countries, which is a consequence of their strong and stable economies combined with the natural constraints their island geography imposes on land and labour. We are at the mercy of events and policies elsewhere, particularly with regard to interest rates, but there are still many levers at the States’ disposal, the most pressing of which is helping to rebalance the island’s housing market, which is causing significant local inflationary pressure.”