UK inflation hits double digits for the first time in 40 years

Rising food prices, such as those for bread and cereals, were the largest contributors. PHOTO: REUTERS

LONDON (BLOOMBERG) - UK inflation accelerated more than expected last month to the highest in 40 years, intensifying a cost-of-living crisis and adding to pressure for action from the government and Bank of England (BOE).

The consumer price index jumped 10.1 per cent in July from a year earlier after a 9.4 per cent gain the month before, the Office for National Statistics (ONS) said on Wednesday (Aug 17). The reading was higher than expected by both the BOE and private-sector economists. 

Rising food prices made the biggest contribution to the month’s increase, indicating inflationary pressures are spreading beyond energy. Investors moved to price in 2 percentage points of increases in the BOE’s key rate to 3.75 per cent by May next year.

“Food prices rose notably, particularly bakery products, dairy, meat and vegetables, which was also reflected in higher takeaway prices,” said Mr Grant Fitzner, chief economist at the ONS. “Price rises in other staple items, such as pet food, toilet rolls, toothbrushes and deodorants also pushed up inflation in July.”

Mr Andrew Sentance, a former BOE policymaker, said key rate may need to rise to 3 per cent or 4 per cent because policymakers have “fallen behind the curve”. 

Core inflation - excluding energy, food, alcohol and tobacco - accelerated to 6.2 per cent from a year ago in July, more than the 5.9 per cent reading that economists had expected.

The figures add to a cost-of-living crisis, with wages falling further behind rising prices for goods and services of all kinds. The BOE expects inflation to top 13 per cent in October when the energy price cap resets, and governor Andrew Bailey has signalled he is prepared to raise interest rates further. Investors are pricing in another 50 basis-point hike in September.

Contenders seeking to replace Mr Boris Johnson as prime minister are promising further aid to those struggling to pay their bills.

“Rising inflation is really putting the squeeze on real wages, even with strong wage growth,” said Mr Mike Bell, global market strategist at JP Morgan Asset Management. “And with the increase in energy bills coming in October, it’s only set to get worse.”

Economists are growing increasingly pessimistic about the UK, with the risk of a recession now seen as far more likely than not due to rising cost pressures. The BOE expects a recession to start in the fourth quarter, lasting into the early part of 2024.

The central bank expects inflation to surpass 13 per cent later this year when regulators allow energy bills to rise again. That would mark the worst reading since September 1980, when Margaret Thatcher’s government struggled to bring a wage-price spiral under control.

Separate figures showed pipeline price pressures appeared to be easing, with fuel and raw material prices rising just 0.1 per cent in July, the smallest monthly increase since December. That was mainly due to a drop in crude oil prices during the month. It still left input prices up 22.6 per cent on the year, only slightly below the record pace recorded in June. 

“The cost of both raw materials and goods leaving factories continued to rise, driven by the price of metals and food respectively,” Mr Fitzner said.

The BOE has blamed Russia for choking off supplies of natural gas, raising the cost of electricity across Europe, for the jump in inflation. Gas futures embedded in the BOE’s forecasts this month were almost double their level in May, and they have risen further in the past week.

Those increases are feeding through into the cost of goods and services, prompting people across the country to demand higher wages. Railway workers plan another round of strikes this week, and teachers, barristers and nurses are considering action of their own.

Real wages adjusted for inflation fell 3 per cent in three months though June, the sharpest pace since records began in 2001, a official data out on Tuesday showed. Employment increased by 160,000 in the second quarter, 46 per cent less than the three months through May, and job vacancies fell for the first time since August 2020.

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