The prospect of inflation reaching 12% this autumn is growing after higher fuel and food prices pushed the official measure of the cost of living to a new 40-year high.
A one-month increase in petrol prices not seen since the late 1980s, combined with nationwide increases in food staples such as eggs, milk, cheese, and vegetables, pushed Britain’s annual inflation rate up from 9.1 percent to 9.4 percent in June.
Analysts warned that the annual energy price cap would rise from just under £2,000 to more than £3,000 in October, and that the worst was yet to come.
Capital Economics’ chief UK economist, Paul Dales, said there were some signs that global price pressures were being replaced by higher domestically generated inflation. “We still think inflation will rise to 12% in October and that interest rates will be raised from 1.25% to 3%, although it’s finely balanced whether they rise by 25bps or 50bps in August,” Dales said.
The Bank of England predicted last month that annual inflation, which stood at 2.5 percent in June 2021 and has risen for nine months in a row, would peak at just over 11 percent in the autumn before falling sharply the following year.
The City had predicted that inflation would rise to 9.3 percent after the price of unleaded gasoline rose by about 20 pence per liter in June. Markets anticipate that the Bank of England will respond to the highest inflation since 1982 by raising interest rates by 0.25 or 0.5 percentage points next month. The Bank’s governor, Andrew Bailey, stated that both would be discussed at the August meeting of its monetary policy committee.
Prices increased by 0.8 percent between May and June, the largest June increase since modern records began in 1988, compared to a 0.5 percent increase in the same month the previous year.
“Annual inflation has again risen to its highest rate in over 40 years,” said ONS chief economist Grant Fitzner. Rising fuel and food prices drove the increase, which was only marginally offset by falling used car prices.”
The cost of motor fuels increased by more than 42 percent in the year to June, according to the UK’s statistical agency, with petrol and diesel reaching new highs last month. Higher fuel prices were only partially offset by a drop in the price of used cars.
Food was the other major driver of the inflation rate increase, with particularly sharp increases in the cost of milk, eggs, and cheese all contributing to a 1.2 percent increase between May and June and a 9.8 percent increase year on year.
According to the Resolution Foundation, the inflation rate for the poorest 10% of households is already 10.6 percent because they spend a higher proportion of their income on food and energy.
“Families are under immense pressure as food and energy costs soar, and companies raise prices much faster than wages,” said TUC general secretary Frances O’Grady.
Core inflation, which excludes food, energy, alcohol, and tobacco, was 5.8 percent in May, down from 5.9 percent the previous year. According to separate ONS data for producer prices, which measures how much firms pay for fuel and raw materials and the prices they charge their customers, more inflationary pressure could be on the way.
“The cost of both raw materials and goods leaving factories has continued to rise, owing to higher metal and food prices,” Fitzner explained. “As a result of these increases, raw materials experienced their highest annual increase on record, while manufactured goods reached a 45-year high.”
“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 Nadhim Zahawi.
“We’ve introduced £37 billion in household assistance, including at least £1,200 for 8 million of the most vulnerable families and exempting over 2 million more low-income people from paying personal tax.”
“The cost of living crisis is leaving families more worried every day,” Labour’s Rachel Reeves said, “but all we get from the Tories is chaos, distraction, and unfunded fantasy economics.”