LONDON (BLOOMBERG) – UK inflation hit a new 40-year high in June, intensifying the cost of living crisis and heaping pressure on the Bank of England (BOE) to deliver an aggressive interest rate increase next month.
Consumer prices rose 9.4 per cent from a year earlier, the biggest increase since February 1982, the Office for National Statistics said on Wednesday (July 20). The acceleration from 9.1 per cent in May was driven by a 9.3 per cent surge in the price of motor fuel over the month.
Prices are now rising far more quickly than wages. The pain for households is set to get worse, with inflation forecast to top 11 per cent in October when another energy price hike kicks in. 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.
“Inflation is likely to stay high for the rest of this year, severely eating into strained household incomes,” said Ms Anna Leach, deputy chief economist at the Confederation of British Industry.
The squeeze on living standards is the main battleground in the contest to succeed Prime Minister Boris Johnson, who announced his resignation this month following a rebellion of his own Conservative Party over a succession of scandals.
Of the three candidates remaining, two have promised billions of pounds of tax cuts to help hard-pressed families and spur businesses investment.
While lowering taxes may boost an economy at risk of sliding into recession, doing so also risks fanning inflation and extending the BOE’s rate-rise cycle.
The tightening squeeze on consumer spending power is starting to sap growth, slowing the recovery from the Covid-19 pandemic. Finance directors of British companies are bracing for a more protracted downturn, with a survey by Deloitte showing many expect a recession.
“The intense cost of living squeeze means the risk of recession is high,” said Mr Hussain Mehdi, macro strategist at HSBC Asset Management.
Rising prices went beyond fuel into many segments of the economy, notably hospitality. Restaurants and accommodation rose by 8.6 per cent in the year to June 2022, up from 7.6 per cent in May.
Food and non-alcoholic beverage prices surged by 9.8 per cent from a year ago, the most since March 2009.
The core consumer price index (CPI) , excluding food, drink, tobacco and energy, rose 5.8 per cent from a year ago in June. That is down from 6.2 per cent in April. The CPI measure for all services rose by 5.2 per cent to the highest in at least a decade.