UK inflation rose more than expected last month to the highest in 40 years, intensifying a squeeze on consumers and adding to pressure for action from the government and Bank of England.
The Consumer Prices Index rose 10.1% in July from a year earlier after a 9.4% gain the month before, the Office for National Statistics said Wednesday. Economists had expected a reading of 9.8%.
Rising food prices made the biggest contribution to this month’s increase, indicating inflationary pressures are spreading beyond energy. The pound briefly spiked to the day’s high of $1.2143 following the release, before paring gains.
“Food prices rose notably, particularly bakery products, dairy, meat and vegetables, which was also reflected in higher takeaway prices,” said Grant Fitzner, chief economist at the ONS. “Price rises in other staple items, such as pet food, toilet rolls, toothbrushes and deodorants also pushed up inflation in July.”
Risk of recession more likely than not
The figures add to a cost-of-living crisis, with wages falling further behind rising prices for goods and services of all kinds. Bank of England Andrew Bailey has signalled he’s prepared to raise interest rates further, and contenders seeking to replace Boris Johnson as prime minister are promising further aid to those struggling to pay their bills.
Economists are growing increasingly pessimistic about the UK, with the risk of a recession now seen as far more likely than not due to rising cost pressures. The BOE expects a recession to start in the fourth quarter, lasting into the early part of 2024.
The central bank expects inflation to surpass 13% later this year when regulators allow energy bills to rise again. That would mark the worst reading since September 1980, when Margaret Thatcher’s government struggled to bring a wage-price spiral under control.
Separate figures showed pipeline price pressures appeared to be easing, with fuel and raw material prices rising just 0.1% in July, the smallest monthly increase since December. It still left input prices up 22.6% on the year, only slightly below the record pace recorded in June.
Output prices rose 1.6% on the month and by 17.1% from a year earlier, the largest annual gain since 1977.
“The cost of both raw materials and goods leaving factories continued to rise, driven by the price of metals and food respectively,” Fitzner said.
Cost-of-living crisis prompting people to demand higher wages
Bailey has blamed Russia for choking off supplies of natural gas, raising the cost of electricity across Europe, for the jump in inflation. Gas futures embedded in the BOE’s forecasts this month were almost double their level in May, and they’ve risen further in the past week.
Those increases are feeding through into the cost of goods and services, prompting people across the country to demand higher wages. Railway workers plan another round of strikes this week, and teachers, barristers and nurses are considering action of their own.
Real wages adjusted for inflation fell 3% in three months through June, the sharpest pace since records began in 2001, official data published Tuesday showed. Employment increased by 160,000 in the second quarter, 46% less than the three months through May, and job vacancies fell for the first time since August 2020.
“The cost-of-living crisis is now very real for both households and businesses, so there needs to be a concrete way forward to support vulnerable groups with higher energy bills,” said Alpesh Paleja, lead economist at the Confederation of British Industry.