Inflation in the UK has hit its highest level in 40 years – and observers warn there is no end in sight to the trend. Prices on the island rose by 9.4 percent in June. This is the highest rate since records began in 1997. According to a back calculation by the ONS statistical office, inflation is likely to have been higher in 1982.
“With energy prices expected to continue to rise from October, inflation is still some way off the peak and is unlikely to return to the Bank of England’s 2% target until mid-2024,” said Yael Selfin, chief UK economist at consultancy KPMG.
Urvish Patel, an economist at the National Institute of Economic and Social Research (NIESR) think tank, also expected inflation not to peak until the end of the year and remain above target in the coming year. “The concern is that things are likely to get worse before they recover,” confirmed Matthew Ryan, head of strategy at financial services firm Ebury.
On October 1st, energy regulator Ofgem will adjust the cap for gas and electricity costs for an average household to reflect market conditions. The latest forecast assumes a renewed increase of more than 60 percent to 3,240 pounds (3,807 euros) a year. A year ago the cost had been £1277. The British are groaning under the highest inflation rate of the G-7 countries. The country has often anticipated developments in continental Europe in recent months.
The central bank has long been concerned that the higher prices could prove to be much more persistent than long thought. The initial triggers for price increases came from outside, said Andrew Bailey, Governor of the Bank of England (BoE) in a speech on Tuesday evening. The war in Ukraine and the consequences for energy and food prices, as well as supply difficulties due to the pandemic are among the important aspects.
In the meantime, however, there is a considerable internal effect. The working population in the country has shrunk significantly since Covid. “That increases the risk that inflation that came in from abroad will stubbornly be stored away as domestic inflationary pressures.”
At the same time, there is increasing pressure in the country to raise wages as prices continue to rise – which is likely to fuel inflation further. Between March and May, real wages, i.e. after taking inflation into account, fell by 2.8 percent in the country compared to the previous year. That was the sharpest drop since the statistics agency started keeping records over 20 years ago. Things are going particularly well at the upper income end. If bonus payments are also taken into account, real wages are 0.9 percent lower than a year ago.
Significant differences can be seen for employees in the private sector and in the public sector. While the first group saw salary increases of 7.2 percent in nominal terms, it was 1.5 percent for teachers, police officers, nurses and civil servants.
On Tuesday, the government announced that the salaries of the 2.5 million public sector employees would be increased by an average of five percent. In this way, a balance should be established with the private sector. However, further steps are not possible without the risk of further heating up inflation.
But the angry reaction from union officials has made it clear that the offer will not be enough. Pathetic, totally inappropriate and a grave mistake were some of the comments. Only 4.5 percent more were promised to doctors in the national health service NHS.
The British Medical Association complained that this was tantamount to “treason against the profession”. “We have millions of people in work who depend on welfare. It’s a scandal,” said Mick Lynch, general secretary of the RMT union, which among other things represents railway employees. These people just weren’t being paid enough.
The RMT was one of the first unions to start strikes. For three days at the end of June, traffic in the rail network largely came to a standstill. Further strike days have already been announced. Other unions are now also examining the possibility of industrial action. Both teachers and staff in the NHS could go on strike in the coming weeks.
Hargreaves Lansdown analyst Susannah Streeter warned that it wasn’t just the job market that was overheating. “The promises of tax cuts by prime ministerial candidates increase the risk that prices will remain high because demand for goods and services is kept up.” The Conservative Party is in the process of doing so following the resignation of Boris Johnson as prime minister and party leader race to succeed him. Almost without exception, the candidates have promised generous tax cuts. In this way they hope to get the high cost of living under control. The financing of the measures has not yet been decided.
The BoE is considering countering the rising prices with a significant interest rate hike, as reducing inflation has “absolute priority”. “Put simply, that means a 50 basis point hike is among the options on the table when we next meet,” Bailey said. The bank has raised interest rates five times since December. The interest rate is currently 1.25 percent. But this poses the next danger, NIESR economist Patel warned. With rate hikes and a simultaneous end to asset purchases, “they are navigating uncharted territory, with the dual risk of recession and prolonged inflation.”
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