All this leaves us somewhere between Scenario A and Scenario B from BoE's April Monetary Policy Report (diff is bigger rise in energy prices and larger lab mkt reaction in Scenario B). So inflation is set to rise further later in the year (although yesterday's VAT cut will take 0.1ppts off that).

Meanwhile measures of more underlying domestic inflation suggest continuing easing in pressures, consistent with slowing private sector wage growth in yesterday's labour market data. Key risk is that higher global energy prices change this picture...

That said, this chart reminds you that the big picture here is one of a huge rise in the cost of essentials since 2021. This is what Andy Burnham is right focused on: big increases in the cost of everyday essentials that hit poorer families (who spend more of their income on them) hardest.

Food *prices* (as well as food inflation) fell again in June. This is very welcome and means that food inflation is now below the BoE's pre-war forecast. Given higher oil prices I would still expect food inflation to rise. But so far there has been good news here.

More importantly, higher global energy prices will put upward pressure on domestic energy bills. It's not clear by how much but, in old money, the Ofgem price cap rose from £1,641 to £1,862 in July, and Cornwall forecasts it will rise again to £1,906 in Oct (after accounting for yesterday's VAT cut)

BUT renewed tensions in the ME have seen a surge in oil prices from around $72pb to $95pb. That means petrol (and other prices) will be on the rise again. Petrol was 155.3p in June. We're likely to see a further fall in July BUT if crude stays where it is there will be rises from August.

The key driver of the fall in inflation was lower petrol prices (in transport in this chart). There were also downward contributions from clothing and food. So good news on cost of essentials in June...

Welcome - and slightly larger than expected - fall in UK CPI inflation in June to 2.6% (2.8 in May). But, with conflict in the Middle East resuming, this is likely to prove short lived, meaning the government is right to focus on cost of living pressures. Thread to follow...

The other thing that would help in this space is to reduce the 1.5ppts premium that has opened up on our debt-servicing costs. Improving the fiscal framework, particularly thinking about ways to reduce or eliminate BoE gilt sales can contribute to that.

To get there, we first need address unsustainable fiscal plans. We estimate that replacing the State Pension triple lock, fully offsetting Fuel Duty receipts, and restoring public services productivity to pre-pandemic levels would more than halve the long run increase in debt-to-GDP.

That’s not to play down how difficult it is to do that. First of all, given recessions, running a current balance *on average* means running current surpluses in good times. That’s not a change of ambition (see chart), but it’s hard.

Any chance this all just goes away? Sadly not. Ageing pressures continue to ramp up in the coming years (albeit at a slower rate).

To accommodate demographic and health pressures we’ve squeezed (more or less) everything else. So the state has been shrinking what it does to make room for health and ageing pressures. This is particularly true for local government (the real devo problem).

But we’re not just older, we’re also sicker. If we control for that (red line below) health spending hasn’t grown much since 2012 (see red line in the chart below).

BUT – it's not all about growth. Demographics are making life harder given the working age share of the population peaked in 2007 and has been falling since. Based on OBR age profiles for tax and spending, ageing since 2007 has cost an estimated £50bn.

This adjustment has not been strategic. This chart shows that as the news of weaker growth arrived in successive OBR forecasts we cut spending at first and then raised taxes. This has resulted in a smaller economy, eg thanks to lower govt investment and a more complex and distortionary tax system.

As this chart shows, the rest of our painful adjustment to our low-growth path has mainly come from cuts to day-to-day spending on public services and higher taxes. This is a grim.

…nearly half of that £450bn is ‘saved’ because weak growth means lower wages and welfare payments (chart shows this for wages). Once you take that into account, growth has ‘only’ hit the public finances by £240bn relative to pre-GFC.

You might think the cause of our weak growth is no mystery given the weak growth of the past. And it's true that weak growth has been *disastrous* for tax – revenues are £450bn below a continuation of pre-GFC trends (see chart) – that’s not all that’s going on…

To set the scene, we estimate that extra spending Burnham inherits (e.g. Defence Investment Plan) and, more importantly, the return to war in the Middle East, means a £14bn hit to current borrowing in 2028-29. So good chance we will need a revenue raising Budget in the autumn.

Here at @resolutionfoundation.org we’re giving advice to Andy Burnham and his new government on how to end our fiscal malaise this morning. Great panel to discuss the difficult issues here…

But if the OBR don't make those assumptions marginal and avg tax rates are implausible and inequality rises. So, while debt looks better, you still have the same unsustainability in the public finances, but it's just showing up in a place thats harder to show on a chart.

So what is making debt explode in the OBR projections? The answer is very simple: spending is on an unsustainable trajectory. This is mainly because we are getting older (and sicker) as a country and it's costing us more to look after people. Grim.

New @OBR_UK Fiscal risks and sustainability report out today: obr.uk/frs/fiscal-r.... Plenty of exploding debt charts to confirm your worst fiscal fears (see below). But there's also some hints at our fiscal salvation... Short thread on that to follow (& a plug for next week)...

What is clear is that wage growth continues to ease in nominal terms is below the 3.25% level the BoE sees as consistent with 2% inflation (although falls in emp in low wage industries is flattering this). This SHOULD mean less chance that we get persistent inflation this time around.

This morning's data show a mixed picture for the labour market with tantalising signs that unemployment MAY have peaked...

This combined with falls in energy prices (see right chart below) means that the outlook for inflation is materially weaker than at the April forecast. This reduces the weight on the high inflation scenario (Scenario C, left chart) and raises in on Scenarios A and B.

So how does the BoE see inflation? It's clear that inflation has come in lower since its April forecasts with material downside news in food (shown below) and services prices.

Bank of England on hold as expected this lunchtime (so rates stay at 3.75%). Big story for today is whether the Bank will give any indication as to whether the next move in rates is up (on inflation concerns) or down (given tumbling energy prices and weak lab market). Short thread to follow...

And while families are still struggling with the high cost of essential (as left chart shows), the winter ahead looks far less daunting if energy price falls stick and we end up with energy bills falling from July levels (see red line on right chart shows).