Bank of England Prepares to Raise Rates Again — and the Public Sector May Be the Inflation Vector Nobody's Watching

The BoE sees 5% inflation ahead and wants to hike rates, but the real transmission mechanism may be a hollowed-out public sector unable to push back on corporate price demands.

A rate rise is coming. The Bank of England's chief economist Huw Pill told the Financial Times that more than one increase is "almost certain," with the 17 December meeting the earliest trigger point. The central bank's own forecasts show inflation climbing to 5% by spring — more than double its 2% target — and with base rates currently at 4%, a move to 4.25% or higher is now consensus among analysts.

The conventional logic runs as follows: the UK economy grew faster than expected this year, but lacks productive spare capacity, so demand must be suppressed with tighter monetary policy or inflation will accelerate. It's a framework that treats every pound of growth as a potential inflationary threat in a sclerotic economy. Businesses facing higher input costs will pass them on. Workers will demand compensating pay rises. The spiral continues. But this framing papers over a critical asymmetry. The Bank's own analysis presumes consumers have money to absorb price hikes. The evidence says otherwise: only households in the top half of the income distribution have increased spending this year, and they've done it by running down savings, not earning more. Lower-income consumers are tapped out. They survived the greedflation and shrinkflation episodes following the pandemic and have become more price-resistant, not less. The article's sharpest insight identifies the real weak link: government as consumer. Public sector procurement — the NHS, local government, Homes England, National Highways — accounts for 25% of all goods and services consumption in the UK economy. After 15 years of austerity and staffing cuts, these institutions may lack the negotiating muscle to resist corporate price escalation. Contractors blame the Middle East conflict for transport costs, climate change for supply disruptions, and new worker protections for overheads. The public sector pays. The numbers tell the story of institutional decay. HS2 budgets have spiralled beyond control. The Lower Thames Crossing — a 14.5-mile tunnel linking Essex and Kent — has more than doubled in cost to £11bn. Government spending on consultants reached £3.7bn in 2024-25, up from £2.9bn in 2022-23, with no apparent ceiling. Plans are commissioned for developments with no funding, generating consultant fees and little else. Inside Threadneedle Street, the assumption is that everyone caves: consumers, government, and business all pay sellers' demands, triggering compensating wage claims from the UK's 33 million workers. But there's an alternative scenario the Bank appears to underweight — a "Can't Pay, Won't Pay" dynamic where exhausted consumers and savvy buyers simply refuse. If even household consumers alone hold the line, inflation may not hit the Bank's forecasts, and rate rises calculated to fight that phantom inflation will instead crush whatever growth remains. The deeper structural problem is that monetary policy is being asked to solve a problem it didn't create and can't fix. The UK's inflation risk doesn't stem from overheated demand — it stems from an economy with degraded public institutions, concentrated corporate pricing power, and a procurement apparatus that has been systematically weakened by a decade and a half of cuts. Raising rates punishes borrowers for an inflation dynamic driven by institutional hollowing and corporate opportunism.