UK inflation hits new 40-year high of 9.4% after rise in fuel prices

Interest rate increase is on the cards to curb runaway prices

Fuel prices have driven inflation to a 40-year high of 9.4 per cent. Bloomberg
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British annual inflation surged to a new 40-year high on Wednesday, pushed by rising fuel costs, adding to the cost-of-living crisis.

The UK's rate of Consumer Prices Index inflation rose to 9.4 per cent in June, up from 9.1 per cent in May, the Office for National Statistics said. It was the biggest increase since February 1982. Simon Clarke, the Chief Secretary to the Treasury, said the figures were “very fractionally higher” than had been expected.

It underlines the chances of a bigger than usual Bank of England interest rate increase next month.

The pain for households is set to worsen, with inflation forecast to top 11 per cent in October when another energy price increase kicks in.

At the same time UK average house prices increased by 12.8 per cent in the year to May 2022, up from 11.9 per cent in April 2022, which means the average house has gained more than £30,000 in the last 12 months.

Prices are now rising far more quickly than wages. On Tuesday, unions representing public sector workers threatened further strikes after the government offered pay increases that amounted to a significant cut in real terms.

The ONS pointed to a 42 per cent year-on-year rise in petrol prices and an almost 10 per cent increase in food prices as the primary drivers of inflation last month.

Fuel prices have risen steeply in recent months, partly due to the war in Ukraine. Despite a reduction in wholesale costs and government temporarily suspending duty, prices still reached as high as 189 pence per litre for unleaded and 197p for diesel.

Grant Fitzner, chief economist at the ONS, said: “Annual inflation again rose to stand at its highest rate for over 40 years.

"The increase was driven by rising fuel and food prices, these were only slightly offset by falling second-hand car prices.

“The cost of both raw materials and goods leaving factories continued to rise, driven by higher metal and food prices respectively.

“These increases saw raw materials post their highest annual increase on record, with manufactured goods at a 45-year high.”

The rise will increase the likelihood of a significant increase in interest rates.

A 50-basis point rise will be on the table at the next meeting of the Bank of England’s decision makers, the central bank chief said on Tuesday as he pledged to bring inflation under control.

Governor Andrew Bailey said that raising interest rates to 1.75 per cent, from 1.25 per cent, would be one of the options for the Monetary Policy Committee.

Although the Bank of England has opted for smaller interest rate rises in the past, some committee members have argued for quicker rate increases.

Officials have raised the benchmark rate five times since December to 1.25 per cent, and money markets are pricing in 3 per cent by the end of the year.

Anna Leach, deputy chief economist at the Confederation of British Industry, said inflation could remain high for the rest of the year, “severely eating into strained household incomes”.

“This data underscores the need to give people more control over their energy bills: through speeding up planning decisions for electricity infrastructure and creating a national effort to help households better insulate their homes," she said.

“But to build resilience to price shocks over the longer-term, the government needs to focus on boosting the economy’s supply potential.

“Incentivising investment through a permanent successor to the super deduction and supporting the development of green infrastructure are crucial first steps.”

Yael Selfin, chief economist at KPMG UK, said: "With further energy bill increases due to take effect from October, the peak in inflation is still some way off, and is not expected to return to the 2 per cent target before mid-2024."

Matt Jochim, Partner at McKinsey & Company, said sharp price rises, particularly in food and petrol, coupled with consumer concerns about food shortages, were having a noticeable impact on UK consumers’ spending behaviour.

"We are seeing consumer confidence tumble, much more so in the UK, than in France, Spain, Italy, and Germany," he said.

“Consumers are trading down. Shoppers are switching brands, trying private label brands and shifting to discount stores."

The latest increase means Britain had the highest rate of inflation in June among the Group of Seven advanced economies. Although Canada and Japan have yet to report June data, neither are expected to come close to Britain's price growth.

Britons' pay packets continue to lag heavily behind inflation, despite a slight rise in earnings.

The ONS revealed on Tuesday that regular wages, excluding bonuses, plunged by 3.7 per cent over the three months to May against the rate of consumer price index inflation, representing the biggest slump in more than 20 years.

Regular pay rose slightly to 4.3 per cent for the period, without taking inflation into account.

Chancellor Nadhim Zahawi said: “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.

“We have introduced £37 billion worth of help for households, including at least £1,200 for eight million of the most vulnerable families and lifting over two million more of the lowest paid out of paying personal tax.”

However, the government is on a collision course with public sector workers, including nurses and teachers, after announcing pay rises that were attacked as a wage cut in real terms.

One union leader warned of co-ordinated strike action in response to pay announcements by ministers, and members of the Royal College of Nursing (RCN) in England will be balloted on industrial action.

More than a million NHS staff, including nurses, paramedics and midwives, will receive an increase of at least £1,400, with the lowest earners set to receive up to 9.3 per cent while dentists and doctors will receive a 4.5 per cent pay rise, police 5 per cent and teachers between 5 per cent and 8.9 per cent.

Health unions said the announcement amounts to a pay cut in real terms.

RCN leaders said in an email to hundreds of thousands of nursing staff “that nursing deserves better".

"Tonight, an emergency session of your elected council voted that members in England will be balloted on industrial action," they said.

“After years of underpayment and staff shortages, the fight for fair pay must continue. Your voice in the upcoming ballot will be essential to turning the tide on low pay."

Shadow chancellor Rachel Reeves said the inflation figures showed there was a need for more than just “sticking plasters” to fix the economy.

Updated: July 20, 2022, 9:34 AM
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