A rise in the rate of inflation to 9.4% is a blow to City analysts who had predicted it would nudge up to only 9.3%. But their bruised egos are irrelevant compared with the financial shock experienced by households and businesses facing the highest annual cost of living increase since 1982.
For the last nine months, food, fuel and energy prices have pushed inflation higher. In June, petrol was the main culprit again, rising by more than 20p a litre and making transport costs eye-wateringly high for the owners of cars, trucks and trains.
A year earlier, inflation stood at 2.5% and looked to be steady as the world emerged from the worst of the coronavirus pandemic. That was before we understood China was planning to keep lockdowns in place wherever and whenever Covid raised its head, hitting the country’s ports and manufacturing base. Supply chain holdups have restricted trade and pushed up prices ever since.
Brexit has also played a part. The prospect of visa restrictions on workers travelling from the EU were clear from the moment Boris Johnson enacted the hardest of Brexits. There has been a shortage of workers ever since, driving up employers’ costs.
In the summer of 2021, when the International Monetary Fund was predicting a return to global growth and falling inflation rates, a Russian invasion of Ukraine was a low probability risk. Today, food prices are more than 10% higher and much of the blame for that rise can be laid at Moscow’s door.
The cost of living crisis has soared to the top of the agenda and, in particular, the squeeze on the disposable incomes of those unable to save during the pandemic who are in the bottom half of the earnings scale.
There was a little good news in the latest figures. The Office for National Statistics’ measure of core inflation, which excludes the more volatile energy, food, alcoholic beverages and tobacco components from the headline consumer price figure, was 5.8% in June, and 6.5% for “core” goods – the lowest since January.
The core inflation figure for goods is also lower than the Bank of England expected when it produced its last forecast in May, when it predicted it would rise a little further from March’s 7.9% rate.
Samuel Tombs, the chief UK economist at the consultancy Pantheon Macroeconomics, said going a step further, and stripping out one-off costs faced by the services sector to give an implied 2.9% “underlying” rate of services inflation, shows it “is in line with its average rate in the 2010s, suggesting that Britain does not have a problem with domestically– generated inflation”.
His point is that, apart from the Brexit fiasco, inflation is all being generated by factors outside the UK, and the Bank of England can do little to calm those causes of inflation when it threatens to increase interest rates further.
This reasoning did not stop the Bank’s governor, Andrew Bailey, hinting on Tuesday night that a half-point rise was “on the table” at next month’s monetary policy committee meeting. Bailey said the central bank was alive to the risks of inflation triggering price and wage increases, and if these pressures persisted, more forceful action would be needed.
The latest labour market survey shows wage increases are stuck at half the level of inflation. Meanwhile, the main components of inflation are, like the weather, cooling.
Business leaders are braced for a recession in the coming months. Higher interest rates are another cost burden on households and businesses they could, and should, do without.
