UK inflation hit a new 40-year high in June, deepening the cost of living crisis and increasing pressure on the Bank of England to aggressively hike interest rates next month.
Consumer prices rose 9.4 percent from a year earlier, the biggest increase since February 1982, the Office for National Statistics said on Wednesday. The 9.1 percent acceleration in May was driven by a 9.3 percent rise in fuel prices over the month.
Prices are now rising much faster than wages. The pain for households is only set to get worse, with inflation forecast to top 11 percent in October if another energy price hike kicks in. On Tuesday, unions representing public sector workers threatened more strikes after the government offered wage increases of sizeable real cuts.
“Inflation is likely to remain high for the remainder of this year, severely affecting strained household incomes,” said Anna Leach, deputy chief economist at the Confederation of British Industry.
Mounting pressure on consumer spending power is starting to weaken growth and slowing the recovery from the pandemic. CFOs at UK companies are bracing for a protracted downturn, with a Deloitte poll showing many expect a recession.
“The severe pressure on the cost of living means the risk of a recession is high,” said Hussain Mehdi, macro strategist at HSBC Asset Management.
Rising prices have impacted many areas of the economy beyond fuel, most notably the hospitality industry. Restaurants and lodging rose 8.6 percent in the year to June 2022, up from 7.6 percent in May.
Food and non-alcoholic beverage prices rose 9.8% year-on-year, the fastest since March 2009
The so-called core consumer price index excluding food, beverages, tobacco and energy rose by 5.8 percent in June compared to the previous year. That’s down from 6.2 percent in April. The CPI metric for all services rose 5.2 percent to its highest level in at least a decade.
BOE policymakers fear that elevated inflation could become entrenched if rising labor and commodity costs force companies to raise prices further.
In his annual Mansion House speech last night in London, BOE Governor Andrew Bailey raised the possibility of a half-point rate hike in August as the central bank ramps up its fight to bring inflation back to the 2% target. If delivered, it would be the first half-point hike since the BOE gained independence in 1997.
Officials have hiked interest rates to 1.25 percent five times since December, and money markets are pricing in 3 percent by the end of the year.
The latest numbers show further signs of inflationary pressures building at the wholesale level at a pace slightly faster than economists were expecting.
Raw material costs rose 24 percent in the year to June, the highest since records began in 1985. This was driven by a surge in metal costs. Manufacturers responded by raising their own prices by 16.5 percent, the highest since 1977. Food prices were a big contributor.
Pressure on living standards is the main battleground in the race to succeed Prime Minister Boris Johnson, who announced his resignation this month after his own Conservative Party rebelled over a series of scandals.
Of the three remaining candidates, two have pledged billions of dollars in tax cuts to help underprivileged families and boost business investment.
“Countries around the world are struggling with higher prices and I know how difficult that is for people here in the UK. That’s why we’re working with the Bank of England to curb inflation,” Finance Minister Nadhim Zahawi said.
While tax cuts could boost an economy at risk of slipping into recession, it also risks stoking inflation and prolonging the BOE’s rate hike cycle.
A separate measure of inflation, the retail price index, rose 11.8 percent year-on-year, the highest since January 1982. This series is used to determine payments on a quarter of Britain’s government debt.
https://www.independent.ie/business/world/uk-inflation-at-new-40-year-high-worsens-living-standards-crisis-41854153.html UK inflation hits new 40-year high worsening crisis in living standards