Britain’s inflation rate surges to a 40-year high of 9%

Consumer prices surged 9% in the year through April, the fastest rate since March 1982.

UK inflation rose to its highest level since Margaret Thatcher was prime minister 40 years ago, adding to pressure for action from the government and central bank.

Consumer prices surged 9% in the year through April, the fastest rate since March 1982, the Office for National Statistics said Wednesday in a report that marked a bleak moment for living standards. Economists had expected a reading of 9.1%.

The leap from 7% in March came from an increase in energy prices, reflecting a surge in wholesale markets that drove a 54% in consumer bills in April. Fuel prices also contributed, reflecting higher oil prices after the war in Ukraine. Both petrol and diesel prices in April rose to a record.

Traders pared money market bets on Bank of England rate hikes, and the pound extended losses against the dollar to the day’s low, falling as much as 0.4% to $1.2444.

The increase is more than double the pace of basic wage growth, squeezing consumer spending power. The pain is set to intensify, with the Bank of England predicting double-digit inflation by October when energy bills are almost certain to jump again.

There was evidence of more generalized inflation, with a 6.7% jump in food and non-alcoholic drink prices. The cost of recreation and culture rose 5.9%, the largest increase since at least 2006, and restaurant and hotel prices were up 8%. Part of that was due to value added tax reverting to the normal rate after the pandemic. Furniture and household equipment rose 10.7%.

What Bloomberg Economics Says …

“The cost-of-living crisis is likely to intensify from here, adding to the Bank of England’s anxiety that inflation expectations may become unanchored. That fear is compounded by an exceptionally tight jobs market, and raises the risk that the central bank will lift rates a little further than we forecast — probably in June and possibly in August.

–Ana Luis Andrade, Bloomberg Economics.

The cost-of-living crisis already has amplified the political debate about how to handle a series of shocks hitting the UK. Prime Minister Boris Johnson’s Conservatives government has targeted relief at those with jobs, while the Labour opposition is calling for an emergency budget to help pensioners and people on benefits.

“Countries around the world are dealing with rising inflation,” Chancellor of the Exchequer Rishi Sunak said in a statement. “We cannot protect people completely from these global challenges but are providing significant support where we can, and stand ready to take further action.”

Both parties and some economists have faulted BOE Governor Andrew Bailey for describing inflation above the 2% target as “temporary” for too long. One of Bailey’s predecessors, Mervyn King, who led the central bank through the crisis in 2008, said last year’s dose of stimulus was a mistake.

Andrew Bailey

“The mistake is that central banks around the world are very confident that inflation will simply fall right back to the target,” King said in an interview on LBC last night. “Most people are going to be worse off because of the higher food and energy prices.”

The jump in inflation highlights the difficult balancing act facing the UK central bank, which is raising interest rates to rein in inflation at a time when the risk of recession is mounting. With the government raising taxes, it also piles pressure on Sunak to bring forward measures to help more people.

Price pressures show no sign of easing. Factory gate prices rose 14% in April, up from 11.9% in March, hitting the highest level since 2008. Input prices, such as commodities, rose at the highest rate since records began of 18.6%. Producer prices are a key indicator of where prices on the high street are going, as they reveal the higher costs businesses face and are likely to pass on.

“It is nevertheless shockingly high,” said Kitty Ussher, chief economist of the Institute of Directors. “As a result, firms are becoming more reluctant to invest, storing up problems for the economy in future.”

The retail prices index of inflation, which includes housing costs, rose to 11.1%, also the highest since 1982. That will drain the public finances, since about a quarter of £2 trillion of government debt is linked to that measure. The interest bill is expected to double to £80 billion this year — and inflation is exceeding forecasts underpinning that estimate.

When consumer prices were last rising this quickly, Thatcher was still battling to subdue an inflation rate that had peaked at 24.5% under the Labour administration in 1975.

Her Conservative government raised interest rates sharply and introduced deep public spending cuts. It worked in narrow terms. By mid-1983, inflation had fallen to 4.1%. But the cost had been a steep rise in unemployment and a recession, much like one experienced in the U.S. at the same time.

British consumers now face one of the worst periods for living standards on record, consigning around 250,000 more households to destitution despite the lowest unemployment for almost 50 years. Bloomberg Economics calculates inflation will add almost £2,400 pounds ($2,990) to the bills of the average household this year.

“Inflation was always likely to hit hard in April given the energy price cap increase,” said Rain Newton-Smith, chief economist for the CBI, Britain’s biggest business lobby group. “Looking ahead, inflation is likely to stay high. It is critical the government explores options to help people facing real hardship.”

Worst in G-7

The shock hitting the UK is worse and likely to prove more enduring than in other advanced economies. Prices are set to rise a further 5.3% next year on average, the highest in the Group of Seven, according to the International Monetary Fund. Andy Haldane, a former BOE chief economist, said high inflation could linger into 2024.

Last week, another former BOE rate setter, Kristin Forbes, issued a downbeat assessment, saying that Britain alone among big economies was facing inflationary pressure from every angle.

What began as a supply-driven energy price shock is now feeding through the prices across the economy. For the BOE, the worry is that a wage price spiral could take hold, as demands for more pay to keep pace with inflation lead companies to raise prices further to protect their profit margins.

With economists now seeing a 40% chance of recession, forecasters are divided over how far policy makers will raise interest rates.

The BOE delivered a fourth successive increase this month to take the benchmark rate to 1%, and money markets are pricing in 2.5% within a year. But economists on balance expect just two more 25 basis-point rises over the summer before policy is put on pause.

© 2022 Bloomberg

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