Annual inflation has burst through the 10% barrier faster than financial markets and the Bank of England expected, but last month’s sharp rise in the cost of living isn’t much of a shock.
Over the past year, the figure has consistently come in higher than forecast, but it won’t just be the jump in the consumer price index (CPI) headline number – up 9.4% in June – that will be cause for concern.
For starters, the Office for National Statistics (ONS) said price increases were visible just about everywhere. The ONS splits the CPI into 12 separate categories, nine of which had inflation rates rising last month. Food prices in particular rose sharply, but there were also increases in clothing and footwear, restaurants and hotels, recreation and culture.
Plus, there’s clearly more bad news to come. The price of goods leaving factory gates – an indication of inflation in the pipeline – rose by more than 17% in the period to July, the highest rate in 45 years.
Annual inflation is clearly not yet at its peak, and the Bank of England’s forecast of a 13.2% peak in October could at least be optimistic.
Threadneedle Street digs below the headline CPI figure to look at measures of core inflation. Here too there was bad news. Inflation excluding food, fuel, alcohol and tobacco stood at 6.2% in July, from 5.8% in June. The inflation rate for services, indicative of price pressures generated domestically as opposed to global forces, was 5.7% in July, compared to 5.2% in June.
The strength of headline and underlying inflation makes it more likely that the Bank’s monetary policy committee will follow its 0.5 percentage point rate hike earlier this month with a similar move when it meets again in September.
At the same time, the risks of a hard landing to the economy have increased as the widening gap between prices and wages leads to a sharp decline in consumer purchasing power.
The ONS reported Tuesday that regular real wages — excluding bonuses — fell at a record 3% — but that was based on a different measure of cost of living than the one the government used to assess whether the 2% inflation target is hit.
By the government’s preferred measure, real revenues fall by more than 5% – unprecedented in modern times. Pressure on the next prime minister to ease an ever-widening cost of living crisis has only mounted.