Chancellor Rishi Sunak stands 'ready to take further action' as inflation jumps to 40-year high
ITV News Business and Economics Editor Joel Hills takes a closer look at how rising inflation is already impacting society
"People washing in their sinks because they can’t afford a hot shower."
"Parents skipping meals to feed their kids."
"Disabled people not using vital equipment because they can’t afford the electricity."
High inflation hurts the poorest in society the most. This morning, Citizens Advice has published some stark illustrations, based on its casework, of the impact rising prices are having on those in the UK on the lowest incomes.
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The headline annual rate of inflation reached 9% in April, carried higher on the back of a steep rise in energy bills.
Ofgem's price cap increased by £693 a year in for a typical family in April.
Gas prices were 95.5% higher last month than in April last year. Electricity prices were 53.5% higher.
The average pump price of diesel reached £1.76 per litre, a record, pushing the headline rate higher.
But there’s more to the UK’s inflation problem than higher fuel and energy costs.
Core inflation - which strips out volatile energy bills - rose to 6.2% in April. Companies are starting to pass on their rising costs (in the form of goods and wages) to their customers.
Manufacturers in the UK are charging 14% more for what they make than they were a year ago.
"Things will get worse before they get better," predicts Paul Dales at Capital Economics.
The Bank of England expects inflation to peak at 10% this winter when the Ofgem price cap is expected to increase again.
Prices are rising in almost every category of goods and services at a rate that will cause real concern, as Joel Hills reports
Andrew Bailey, Governor of the Bank of England, told MPs on Monday that the UK is being hit by a series of external shocks - the pandemic, war in Europe - which the Bank can do very little about. It plans to ensure that the hit to our living standards is short-lived by bringing inflation under control.
It isn’t yet clear how high interest rates will have to rise to tame inflation. Capital Economics thinks Bank Rate will have to reach 3%, investors are betting on 2.5% this time next year.
Bank Rate currently stands at 1%.
On Tuesday, Mervyn King, the Bank’s former Governor told LBC the idea that interest rates at that level would impact inflation is "very strange".
He wants the Bank to hike more aggressively and send a "strong, clear signal" that high inflation will not be tolerated.
Prices will stabilise at some point, inflation will come down eventually. What economists call "base-effects" have a gravitational pull. Officially, annual used car inflation is running at 27% but prices haven’t increased since January and, if this remains the case, the headline rate will slump.
The Bank's challenge is to make sure that virulent inflation, which to-date has mostly been "imported" - a consequence of events elsewhere in the world - does not start getting generated domestically.
Adam Posen, a former member of the BoE's monetary policy committee, suggested to Joel Hills that interest rates will have to be significantly increased to tame spiralling inflation
Its worry is the labour market looks tight with more jobs than job-seekers.
In the meanwhile, everyone will feel poorer. We are in for a period of belt-tightening. Richer households will consider ditch subscriptions to streaming services, those on the lowest incomes face hardship and, if the National Institute of Economic and Social Research is right, destitution.
The government has already announced £22 billion of financial support, £9 billion of which is targeted at cushioning the rise in energy bills.
The Resolution Foundation calculates that, despite this, the typical family faces a fall in its real income of at least £1000 in the next year.
The chancellor on Wednesday morning repeated his view that the government "cannot protect people completely from these global challenges" and says he stands "ready to take further action".
Some in his own party wonder what he is waiting for.
On Wednesday night, Rishi Sunak is expected to address the cost of living squeeze in a speech at the Confederation of British Industry’s annual dinner.
This morning, the CBI’s Chief Economist said it is "critical the government explores options to help people facing real hardship now".
The chancellor will, understandably, want to proceed cautiously. Wrongly directed, extra billions from the taxpayer would itself be inflationary.
The Resolution Foundation argues this risk can be avoided by channelling support to those who need it most via the benefits system (Universal Credit) or by significantly increasing the Warm Homes Discount - a scheme to reduce energy bills for poorer households.
There’s no indication that the chancellor plans to do either of these things imminently.