Joel Hills explains how the soaring cost of food has helped push UK inflation to its highest rate in four decades
If the markets are right, then the economy is definitely heading for recession and home owners are about to find out that their property isn’t worth what they think it is.
Investors are betting that this painful bout of high inflation will prove more stubborn and persistent than the Bank of England expects and that interest rates will have to rise aggressively to tame it.
The money is on Bank Rate hitting 3.5% by June next year.
The markets aren’t always right - you’ll recall that six years ago they called the referendum for Remain - but it’s a sign of how highly serious the current situation is.
The headline annual rate of inflation in the UK edged up to 9.1% in May on the back of a surge in the price of everyday essentials.
Food inflation was rampant. Everyday essentials like meat, bread, milk, eggs, cheese, oils and fats rose at an eye-popping velocity.
The ONS calculates that, last month, petrol and diesel prices were almost 33% higher than in May last year. Both have since risen again.
This story is about much more than sky-high energy bills. Price rises look broad based.
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Core inflation, which ignores food and energy prices that tend to be volatile, eased to 5.9% but that’s still a 30 year high and well above the Bank of England’s target of 2%.
“Services inflation is starting to pick-up,” points out Sushil Wadhwani, who used to serve on the Bank’s Monetary Policy Committee. “That’s usually a very clear sign that inflation is feeding on itself.”
Wadhwani believes the Bank needs to raise interest rates more aggressively.
“I believe it's time to pick up pace. Instead of increases of [0.25%] they should seriously consider increments of [0.5%] of maybe even one of [0.75%].
"I think it's incredibly important to provide demonstration to everyone in the economy that they are seriously controlling inflation.”
There’s more inflation in the pipeline. In factories across the UK the price of raw materials has risen at a record pace.
One obvious solution to much higher prices is much higher pay. But the Bank of England and the government argue that would be disastrous - that if wages were to rise in line with inflation they would simply be financed by another round of price rises.
The government preaches wage restraint but its decision to reinstate the “triple-lock” on pensions means pensioners are likely to see their incomes rise by 10% or wherever the headline rate of inflation is in September.
Sushil Wadhwani breaks down why he believes there is an example from the 1970s to follow
“Pensions are not an input cost into the cost of producing goods and services we all consume, they don’t add to inflation in the same way,” explained the chancellor today.
Unions argue the same logic applies to their members working as teachers, police officers and civil servants in the public sector.
5.5 million public sector workers will find out in the coming weeks how much their pay will rise.
Rishi Sunak says increases will be “proportionate” and “affordable” and ”balanced with the need not to make inflationary pressures worse.”
10% is unthinkable. Not least as government departments are working with budgets set last September when the OBR and the Treasury expected inflation to run at c4% this year.
It’s going to be more than double that but the chancellor has no intention of reopening the spending numbers.
The months ahead look incredibly challenging. Household budgets are being crushed and our living standards are falling.
The unions are on march, industrial relations are under strain and when inflation is high and rising it makes disputes harder to resolve.