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UK inflation at new 40-year high worsens living standards crisis

Consumer prices rose 9.4% from a year earlier, the biggest increase since February 1982, the Office for National Statistics said Wednesday.
Image: Bloomberg

UK inflation hit a new 40-year high in June, intensifying the cost of living crisis and heaping pressure on the Bank of England to deliver an aggressive interest-rate increase next month.

Consumer prices rose 9.4% from a year earlier, the biggest increase since February 1982, the Office for National Statistics said Wednesday. The acceleration from 9.1% in May was driven by a 9.3% surge in the price of motor fuel over the month.

Prices are now rising far more quickly than wages . The pain for households is set to get worse, with inflation forecast to top 11% in October when another energy price-hike kicks in. On Tuesday, unions representing public-sector workers threatened further strikes after the government offered pay increases that amounted to a significant cut in real terms.

“Inflation is likely to stay high for the rest of this year, severely eating into strained household incomes,” said Anna Leach, deputy chief economist at the Confederation of British Industry.

What Bloomberg Economics Says …

“UK CPI inflation moved higher again in June thanks to rising food and fuel prices. The headline rate is unlikely to drop below 9% this year and is set to move into double figures in the winter. Taken alongside elevated inflation expectations and a tight labor market, we think the Bank of England remains on course to deliver a 50 basis point hike in August.”

–Dan Hanson, Bloomberg Economics. Click for the REACT.

The tightening squeeze on consumer spending power is starting to sap growth, slowing the recovery from the pandemic. Finance directors of British companies are bracing for a more protracted downturn, with a survey by Deloitte showing many expect a recession.

“The intense cost of living squeeze means the risk of recession is high,” said Hussain Mehdi, macro strategist at HSBC Asset Management.

Rising prices went beyond fuel into many segments of the economy, notably hospitality. Restaurants and accommodation rose by 8.6% in the year to June 2022, up from 7.6% in May.

Food and non-alcoholic beverage prices surged by 9.8% from a year ago, the most since March 2009

The so-called core consumer price index, excluding food, drink, tobacco and energy, rose 5.8% from a year ago in June. That’s down from 6.2% in April. The CPI measure for all services rose by 5.2% to the highest in at least a decade.

BOE policy makers are worried that elevated inflation could become entrenched if rising wage and raw-material costs force companies to keep hiking prices.

In his annual Mansion House speech in London last night, BOE Governor Andrew Bailey floated the possibility of a half-point rate increase in August as the central bank steps up its battle to bring inflation back to the 2% target. If delivered, it would mark the first half-point increase since the BOE gained independence in 1997.

Officials have increased the benchmark rate five times since December to 1.25%, and money markets are pricing in 3% by the end of the year.

The latest figures show further signs of inflationary pressures building at the wholesale level at a pace slightly higher than economists had expected.

Raw material costs surged 24% in the year through June, the most since records began in 1985. That was driven by a leap in the cost of metals. Manufacturers responded by raising their own prices by 16.5%, the most since 1977. The price of food products made a big contribution.

The squeeze on living standards is the main battleground in the contest to succeed Prime Minister Boris Johnson, who announced his resignation this month following a rebellion of his own Conservative Party over a succession of scandals.

Of the three candidates remaining, two have promised billions of pounds of tax cuts to help hard-pressed families and spur businesses investment.

“Countries around the world are battling higher prices and I know how difficult that is for people right here in the UK, so we are working alongside the Bank of England to bear down on inflation,” said Chancellor of the Exchequer Nadhim Zahawi.

While lowering taxes may boost an economy at risk of sliding into recession, doing so also risks fanning inflation and extending the BOE’s rate-rise cycle.

A separate measure of inflation, the retail price index, surged 11.8% from a year ago, the most since January 1982. That series is used to determine payments on a quarter of UK government debt.

© 2022 Bloomberg

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