The UK’s Office for National Statistics said its estimates suggest that inflation would have last been higher “sometime around 1982.”
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LONDON — UK inflation soared to a 40-year high of 9% in April as food and energy prices spiraled, official figures revealed Wednesday, escalating the country’s cost-of-living crisis.
Consumer prices rose by 2.5% month-on-month, fractionally below expectations for a 2.6% climb in a Reuters poll of economists, which had also projected a 9.1% annual increase.
The 9% rise in the consumer price index is the highest since records began in their current form in 1989, outstripping the 8.4% annual rise posted in March 1992 and well ahead of the 7% seen in March of this year. The UK’s Office for National Statistics also said its estimates suggest that inflation would have last been higher “sometime around 1982.”
From April 1, the UK energy regulator increased the household energy price cap by 54% following a surge in wholesale energy prices, including a record rise in global gas prices. The regulator, Ofgem, has not ruled out further increases to the cap at its periodic reviews this year.
Bank of England pressure
The Bank of England has hiked interest rates at four consecutive meetings, raising the cost of borrowing from its historic pandemic-era low of 0.1% to a 13-year high of 1%, as it looks to rein in runaway inflation without stomping out economic growth.
A recent survey showed that a quarter of Britons have resorted to skipping meals as inflationary pressures and a food crisis confirm in what Bank of England Governor Andrew Bailey has dubbed an “apocalyptic” outlook for consumers.
Wednesday’s mammoth inflation print delivers another “hammer blow” to households already worried about the cost of living, and there are warnings that the worst is yet to come.
“Unlike in the US, UK inflation continues to rise for the time being, stoking further fears around the cost of living,” said Richard Carter, head of fixed interest research at Quilter Cheviot, in a research note.
“It will also add to the pressure on the Bank of England to increase interest rates and get to grips with soaring prices even if, as they themselves admit, many of the factors driving inflation are beyond their control.”
Carter suggested that further pressure is likely to mount on the British government to pull fiscal levers and look to “alleviate the pain on households come the Autumn.”
While the Bank may ordinarily prefer to look through the supply shock driving up energy and commodity prices, robust labor market data makes the current predicament especially difficult to shrug off.
“For the first time since records began, there are fewer people unemployed than there are job vacancies and the unemployment rate now sits at a nearly 50-year low, and workers are capitalizing on their increased bargaining power to ask employers to raise pay to cope with higher living costs, with wage growth now running at 7%,” noted Ambrose Crofton, global market strategist at JPMorgan Asset Management.
“The risk is that you should [the Bank of England] raise interest rates too quickly at a time when consumers are already feeling the pinch, then this could crimp demand and push the economy into recession. Doing too little, however, risks entrenching inflation expectations and leading to a more persistent wage-price feedback loop.”
JPMorgan strategists therefore believe the Bank will attempt to strike a balance by cautiously raising interest rates one meeting at a time, while watching economic data closely for signs of moderating labor market or wage pressures.
The British Chambers of Commerce warned following Wednesday’s announcement that the “eye-watering” inflation rate and cost-of-living crisis facing households is damaging firms’ ability to invest and operate at full capacity.
“The scale at which inflation is damaging key drivers of UK output, including consumer spending and business investment, is unprecedented and means there is a real chance the UK will be in recession by the third quarter of the year,” said Suren Thiru, head of economics at the BCC, in a note.
“While inflation may moderate a little over the summer, April’s inflationary surge is likely to be surpassed in October as the expected energy price cap rise in the month lifts inflation above 10%.”
The BCC called on the British government to help consumers and businesses through the crisis by reversing its recent increase to National Insurance — a tax on income — and cutting VAT (value added tax) on business energy bills.