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

Inflation in the UK has peaked since Margaret Thatcher became Prime Minister 40 years ago, adding to the pressure on the government and the central bank to act.

Consumer prices have risen 9% year-on-year since April, the fastest rate since March 1982, the Office for National Statistics said in a report Wednesday that marked a dark moment for living standards. Economists expected a reading of 9.1%.

The rise in electricity prices from 7% in March reflects an uptick in the wholesale market, which increased consumer bills by 54% in April. Fuel prices also contributed to the high oil prices that followed the war in Ukraine. Petrol and diesel prices rose to record levels in April.

Traders placed money market bets on the Bank of England rate hike, and the pound increased its day-to-day losses against the dollar, falling 0.4% to 24 1.2444.

This increase is more than double the rate of basic wage growth, reducing consumers’ ability to spend. With the Bank of England predicting double-digit inflation by October, the pain is likely to intensify when energy bills are almost certain to jump again.

The 6.7% jump in food and non-alcoholic beverages was evidence of more general inflation. Entertainment and culture spending rose 5.9%, the biggest increase since at least 2006, and restaurant and hotel prices rose 8%. Part of this was due to the return of value added tax at the normal rate after the epidemic. Furniture and household appliances grew 10.7%.

What Bloomberg Economics Says

“The cost of living could be exacerbated by this, adding to the Bank of England’s concern that inflation expectations could continue. This fear is compounded by an exceptionally tight job market, and increases the risk that the central bank will raise rates slightly higher than we predicted – perhaps in June and perhaps in August.

-Ana Lewis Andrad, Bloomberg Economics.

The cost of living has already fueled the political debate over how to deal with multiple shocks that have hit the UK. Prime Minister Boris Johnson’s Conservative government has targeted relief for those in jobs, while opponents of labor have called for an emergency budget to help pensioners and beneficiaries.

“Countries around the world are grappling with rising inflation,” Exchequer Chancellor Rishi Sunak said in a statement. “We cannot fully protect the people from these global challenges but we are providing significant assistance wherever we can and are ready to take further steps.”

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

Andrew Bailey

“The mistake that can easily get your claim denied is to fail,” King said in an interview with LBC last night. “Most people are going to get worse because of the high food and energy prices.”

The jump in inflation highlights the tough balancing act facing the UK central bank, which is raising interest rates to keep inflation in check while increasing the risk of a recession. As the government raises taxes, it puts pressure on Sunak to take steps to help more people.

There are no signs of price reduction. Factory gate prices rose 14% in April, from 11.9% in March, the highest level since 2008. Input prices, such as commodities, have risen at an all-time high of 18.6% since the start of the record. Producer prices are a key indicator of where high street prices are going, as they reveal the high cost that businesses are facing and are likely to go away.

“Yet it’s surprisingly high,” said Kitty Usher, chief economist at the Institute of Directors. “As a result, companies are becoming more reluctant to invest, saving for the future economy.”

The retail price index, which includes housing costs, rose 11.1%, the highest since 1982. This would lead to a deficit of public money, since about a quarter of the government debt of 2 2 trillion is associated with this measure. Interest bills are expected to double to £ 80 billion this year – and inflation exceeds that estimate.

When consumer prices last rose so sharply, Thatcher was still struggling to reduce the inflation rate, which peaked at 24.5% under the Labor administration in 1975.

His conservative government has sharply raised interest rates and introduced deep government spending cuts. It has worked in narrow terms. By mid-1983, inflation had dropped to 4.1%. But spending was a sharp rise in unemployment and recession, much like those experienced in the United States at the same time.

Despite having the lowest unemployment rate for almost 50 years, British consumers are now facing one of the worst times for quality of life on record, pushing around 250,000 more families into poverty. Bloomberg Economics estimates that inflation will add about £ 2,400 ($ 2,990) to this year’s average household bills.

Ryan Newton-Smith, chief economist at CBI, Britain’s largest business lobby group, said: “Looking to the future, inflation is likely to be higher. It is important that the government seeks alternatives to help those in real need. ”

Worst in G7

The shock hitting the UK is worse and could prove to be more lasting than other developed economies. According to the International Monetary Fund, prices will rise another 5.3% on average next year, the highest among the Group of Seven. Andy Haldane, the former chief economist at the BOE, says high inflation could last until 2024.

Last week, another former BOE rate setter, Christine Forbes, released a low-income assessment, saying that Britain alone was facing inflationary pressures from every angle in the larger economy.

What started out as a supply-driven energy price push is now feeding through prices across the economy. For the BOE, the concern is that wage prices may spiral, as lead companies demand higher wages to keep pace with inflation, raising prices further to protect their profit margins.

Economists now see a 40% chance of a recession, with policymakers divided over how much interest rates will raise.

The BOE has provided the fourth consecutive increase this month to bring the benchmark rate to 1%, and the money market is setting a price target of 2.5% in one year. But with the balance, economists expect a further 25 basis-points increase in the summer before the policy break.

© 2022 Bloomberg

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