ISLANDERS “won’t necessarily feel better off” despite inflation predicted to “decline sharply” to 2% or lower within the next few years, according to an economic adviser.
Dame Kate Barker, who chairs the Fiscal Policy Panel, which provides advice on public finances to the government and States Assembly, also said she did not expect prices – except for those in the energy sector – to fall, but merely to increase more slowly.
In its latest report, the panel has raised concerns about the Island’s Strategic Reserve, known as the rainy day fund, which it argues is “unlikely to be sufficient to meet a major crisis” as well as the Stabilisation Fund.
The panel said that the government had failed to capitalise on booming banking profits driven by high interest rates, which it said should have been used to bolster reserves.
It said: “The Strategic Reserve balance is forecast to decline as a share of GVA. In 2027, it is forecast to stand at £1,206 million, roughly half the minimum level recommended by the panel.”
The report continued: “It is disappointing not to see stronger commitment to add to the reserves, given the current and recent past strength of government revenues.”
Dame Kate said: “The worry we have is that we’re going into this period with a low level of reserves. [There is] lots of money coming in from banking profits, but not being used to rebuild the reserves.”
However, the report also states that inflation has “peaked” and is forecast to fall steadily.
It adds: “However, higher prices are affecting households who face an elevated cost of living. With many mortgage holders protected by fixed rates the full effect of the interest rate rises has not been felt yet but will materialise as these fixed deals come to an end.”
According to the latest figures published by Statistics Jersey, during the 12 months to September, the Retail Prices Index increased by 10.1% – a 0.8% drop from June’s rate of 10.9%.
The figure peaked at a 40-year high of 12.7% in March.
Dame Kate said: “Inflation is coming down at the rate that was anticipated and indeed, on our main assumptions, we expect inflation to fall to quite low levels two or three years down the line.”
Noting that it could drop to 2% or less, she added: “There are two reasons for that. One is that we would expect interest rates to stop increasing, so that will take the pressure off the part of inflation that is responsive to interest rates. But also, that will take the pressure off the increase in housing costs.
“Of course, the fact that inflation is coming down doesn’t mean that people are out of the woods, because the level of rents and the level of mortgage rates will still stay high. So unless earnings increase, people won’t necessarily feel better off – but inflation is likely to decline sharply.”
Commenting on whether prices could start to come down, she said: “Energy prices may come down, but because interest rates don’t seem likely to come down then housing costs may stay high for quite a while – because landlords will have to pay higher interest rates. That will tend to push rents up and mortgage rates are likely to stay higher than they were a couple of years ago.”
She added: “Equally, some of the other things affecting inflation – such as higher food prices because of supply chain difficulties and climate change difficulties – I don’t think those are going to go away. So I’m not expecting to see the price level go back to what we had in, say, 2021.”
