UK inflation rises to fresh 40-year peak of 9.1% as cost of living crisis worsens – business live

More reaction to the UK inflation figures and what they mean for Bank of England policy.

Ian Stewart, chief economist at Deloitte, said:

Set against inflation of over 9.0%, base interest rates of 1.25% remain by historic standards very low. Significant rate rises lie ahead; we expect base rates to more than double in the next six months.

The Bank of England is presiding over what seems likely to be the sharpest tightening of monetary policy since the 1980s. It is touch and go as to whether the Bank will be able to curb inflation without triggering a recession.

The ONS has started tracking the price of the lowest-cost grocery items.

The sample contained a range of products from pasta or rice to milk or frozen vegetables. For each item, the price of the cheapest product was selected from online shops.

The highly experimental results showed that the lowest-priced items increased in cost by a similar amount to average food and non-alcoholic drinks prices, around 6% to 7% over the 12 months to April 2022. However, there is considerable variation in price movements across the 30 items.

My colleague, our Money editor Hilary Osborne, tweets:

While gas and electricity prices have soared in the UK following a jump in wholesale costs, other governments have done more to mitigate the impact on consumers.

The Spanish government intends to cut the value-added tax charged on electricity bills further, to 5% from the current 10%, prime minister Pedro Sanchez said today, Reuters reported. Last yer, Madrid reduced the value-added tax rate on electricity to 10% in a bid to slow down the effect of the wholesale electricity price rises on consumers.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, has crunched the numbers.

Looking ahead, we think the headline rate of consumer price inflation will hold broadly steady in June and during Q3, as further increases in food and motor fuel inflation are countered by a decline in core CPI inflation. Note that the month-to-month rise in the core CPI [excluding food and energy] in June 2021 was a hefty 0.5pp larger than its average June rise in the 2010s, primarily because services firms hiked prices as they exited the lockdown.

In addition, price rises should start to come off the boil for many discretionary goods, now that consumers have less money left over following big increases in food and energy prices. The run-rate of price rises in the services sector likely will ease too, now that hospitality and tourism businesses have fully responded to the return of their VAT rate to 20%.

Alas, the headline rate likely will climb to a new peak of about 10.5% in October, when Ofgem looks set to increase its default tariff cap by about 45%. But the decline in core inflation should gather momentum later this year, as recent falls in shipping costs are passed on to consumers and global producer output price inflation rolls over, now that both the inventory rebuilding cycle and the recovery in consumer demand are petering out.

We think that the monetary policy committee will stop hiking Bank Rate as soon as month-to-month increases in the core CPI have slowed to their long-run average rate—a point which we think will be reached in the autumn. As a result, we expect the committee to hike Bank Rate by 25bp in August and a further 25bp in September, before then leaving it on hold at 1.75% from November onwards.

Europe’s main share indices have opened lower.

The FTSE 100 index in London has lost 100 points, or 1.4%, to 7,051 at the opening bell. Germany’s Dax is down 1.7%, France’s CAC has lost 1.6%, Spain’s Ibex slid 1.2% and Italy’s FTSE MiB recorded the largest fall, of 1.8%.

To recap: UK inflation has risen to 9.1%, the highest rate in 40 years amid the soaring cost of food and record prices for petrol and diesel.

The figures from the Office for National Statistics showed that inflation, as measured by the consumer price index, hit its highest level since March 1982, adding to the strain on households, especially those on lower incomes.

The ONS said the main contribution came from food and non-alcoholic drink prices rising at the fastest annual rate since 2009. Bread, cereals and meat in particular became more expensive, while fruit prices were little changed last month.

Record prices for petrol and diesel also drove inflation higher as motor fuels jumped by nearly a third over the past year, the biggest annual increase on records dating back to 1989.

Last week the Bank of England warned inflation was on course to reach 11% later this year as gas and electricity prices soar. Meanwhile, the government and Network Rail are at loggerheads with rail unions in a bitter dispute over pay and conditions and the biggest train strikes since the 1980s. Rail workers have been offered a pay rise of just 2%.

Some Asda shoppers set £30 limits at the tills, says Lord Rose

Joanna Elson, chief executive of the Money Advice Trust, the charity that runs National Debtline and Business Debtline, has urged the government to do more to help those on the lowest incomes, by “significantly raising benefits”.

With inflation now at 9.1%, rising costs are weighing heavily on household budgets. For many people, the increasing burden of high prices is already taking its toll and is only adding to the difficulty of meeting day-to-day costs.

At National Debtline and Business Debtline we are hearing from more and more people with deficit budgets – where their income simply isn’t enough to cover their basic needs. Our worry is that options are running out for people who are already in financial difficulty.

The package of further support recently announced by the government goes some way towards helping households under pressure. For those on the lowest income, however, urgent action is needed, including significantly raising benefits.

While food, energy and petrol costs all rose, games and toys became cheaper in May, reflecting price changes for computer games, particularly downloads. Overall prices fell by 2.4%, compared with a rise of 2.8% a year earlier.

However, the ONS warned that price movements for computer games can sometimes be large, depending on the bestseller charts, so “short-term movements need to be interpreted with caution”. Prices of television also fell.

You can read more here.

The chancellor of the exchequer, Rishi Sunak, said:

I know that people are worried about the rising cost of living, which is why we have taken targeted action to help families, getting £1,200 to the eight million most vulnerable households.

We are using all the tools at our disposal to bring inflation down and combat rising prices – we can build a stronger economy through independent monetary policy, responsible fiscal policy which doesn’t add to inflationary pressures, and by boosting our long-term productivity and growth.

However, he has been criticised for not doing enough to help those most affected by the soaring cost of living.

Average petrol and diesel prices in May were the highest on record, the ONS said — 165.9 pence per litre for petrol, compared with 127.2p a year earlier, and 179.7p per litre for diesel. The 12-month rate for motor fuels was 32.8%, the highest since before the start of the data series in January 1989.

Energy costs also pushed up consumer prices in May. The ONS said as wholesale gas prices quadrupled in the last year, the rise resulted in 12-month inflation rates of 53.5% for electricity and 95.5% for gas in April. These are unchanged in May.

UK inflation rises to 9.1%

Low-income families in the UK’s poorest neighbourhoods are paying up to £541 a year more than affluent households to access the same basic services such as energy and insurance, and buy essential items such as TVs and fridges, according to a study, writes our social policy editor Patrick Butler.

The Fair by Design charity has called for the government and regulators to outlaw practices it says discriminate against the poorest families, costing them hundreds of pounds a year because of where they live, how much they earn, or how they are paid.

One in eight households in the UK experiences at least one type of poverty premium, paying on average £430 a year in extra costs, though it is far more prevalent in deprived areas, especially in the north and Midlands regions of England.

Britain’s cost of living crisis is being made worse by Brexit dragging down the country’s growth potential and costing workers hundreds of pounds a year in lost pay, new research claims, writes our economics correspondent Richard Partington.

The Resolution Foundation thinktank and academics from the London School of Economics said the average worker in Britain was now on course to suffer more than £470 in lost pay each year by 2030 after rising living costs are taken into account, compared with a remain vote in 2016.

In a report six years on from the referendum, the researchers said Brexit was damaging the competitiveness of UK exports on the world stage just as companies are forced to deal with the fallout from the coronavirus pandemic and Russia’s war in Ukraine pushing inflation to historic levels.

“A less open Great Britain is expected to be poorer and less productive,” it said.

Official figures due on Wednesday are expected to show a fresh rise in the inflation rate from 9% in April to 9.1% last month, as surging petrol prices and the rising cost of a weekly shop ramps up the pressure on struggling families. The Bank of England has warned the inflation rate could reach 11% by October.

Michael Hewson, chief market analyst at CMCM Markets UK, says:

Today’s main focus will be on the latest UK inflation numbers for May, as well as US Federal Reserve chair Jay Powell’s testimony to US lawmakers this afternoon.

Last week the Bank of England caused a few eyebrows to go up when they only raised the base rate by 25 basis points, while at the same time saying that they would act “forcefully” on inflation if necessary.

They then followed that up by saying they expect inflation to peak at an eye watering 11% by year end, an upgrade from its previous 10% estimate, begging the question as to what level of inflation would justify a bigger hike?

With headline inflation already at 9% this messaging merely served to showcase what a muddle the Bank of England finds itself in, and was reinforced yesterday by chief economist Huw Pill when he said that the central bank would allow growth to weaken in order to help the bank hit its 2% inflation target.

Introduction: UK inflation to rise to fresh 40-year high