Monday, November 29, 2021

Inflation is rising to its highest level in a decade

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Inflation in the UK climbed sharply to 4.2 percent in October, its highest level in nearly a decade, fueled by rising fuel and energy prices, which put pressure on the Bank of England to hike its key rate at its December meeting.

The cost of living, as measured by the National Statistics Office’s consumer price index, rose the fastest since November 2011 last month. In October alone it rose by 1.1 percent, which is mainly due to the higher energy costs of households.

On Monday, Bank of England governor Andrew Bailey told MPs he was “very uncomfortable” with rising inflation.

The new data comes after employment numbers bucked some economists’ expectations by showing resilience to the end of the vacation program in early October. The unemployment rate fell to 4.3 percent from July through September, and employers added 160,000 workers to their payrolls last month.

The cost of living crisis showed little sign of slowing on Wednesday, however, with the National Statistics Office’s consumer price index up 4.2 percent in October, compared with 3.1 percent in September. This compares to an underlying wage growth rate that the ONS holds appreciated between 3.2 and 4.4. Percent, while official data has likely been skewed by the effects of COVID-19.

Both the Bank of England and the government’s official spending watchdog, the Office for Budget Responsibility, have suggested that price growth could reach up to 5 percent by early next year, outpacing wage growth and putting pressure on household budgets.

Grant Fitzner, ONS chief economist, said: “Inflation rose sharply in October to its highest level in nearly a decade.

“This was caused by increased household electricity bills due to the increase in the price cap, increased costs for used cars and fuel, and higher prices in restaurants and hotels.

“The costs of the goods produced by the factories and the prices of raw materials have also risen significantly and are now at their highest level for at least 10 years.”

The 4.3 percent interest rate for the twelve months to October is more than double the Bank of England’s government mandate to contain inflation to nearly 2 percent. The latest data are therefore increasing the pressure on politicians to raise the key interest rate from its historically low level of 0.1 percent.

However, the numbers also come from mounting evidence that the UK’s economic recovery has stalled from the pandemic, increasing the risk that a rate hike could slow economic growth further.

Jack Leslie, chief economist at the Resolution Foundation think tank, said, “The global economic recovery has caused a rapid surge in inflation that families are feeling at the gas pump, on their energy bills and in their payrolls. With the inflation forecast reaching 5 percent by next spring, we could be prepared for a sustained phase of shrinking salary packages.

“While this is painful for households, the fact is that, given the global nature of these inflationary pressures, traditional instruments like rate hikes are unlikely to have much effect.

“Instead, we need to focus on securing the ongoing Covid recovery so that stronger growth creates more scope for higher wage increases.”

Aside from higher energy costs, the surge in the ONS’s price growth measure, VPI, was also fueled by price increases in education, transport, clothing and footwear, housing and household services, and restaurants and hotels, suggesting that service providers may overtake costs for higher salary packages for staff and disruption of the supply chain for consumers.

But while City and Bank of England economists believe inflation could hit 5 percent next spring, some believe it will fall by the end of 2022, which means any hikes in the central bank’s key rate will be capped.

A “peak” of 5 percent in April 2022 “would be in line with the bank’s forecast, which, according to the bank, is compatible with rising interest rates,” said Paul Dales, UK chief economist at Capital Economics.

“We expect CPI inflation to fall a little further and a little faster in the second half of next year, perhaps close to the 2.0% target by December 2022,” he added. “Although interest rates could rise from 0.10 percent to 0.25 percent in December and perhaps to 0.50 percent in February, we don’t think they will reach the 1.00 to 1.25 percent currently priced in the market will be at the end of next year. “

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