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finance & economyJanuary 19, 2022

UK inflation expected to touch 30-year high

Britain’s inflation rate is expected to hit a 30-year high on Wednesday, when the government releases its December data, as households across the country face a cost-of-living crisis.
Economists expect inflation to hit 5.2 per cent in the final month of 2021 – the joint highest rate since the early 1990s and a 0.1 per cent increase on the 5.1 per cent recorded in November, which itself was a decade high.
While most pundits see Consumer Price Inflation surging to a peak of 6 per cent by April, Paul Dales, chief UK economist at Capital Economics, expects the figure to edge closer to the 7 per cent mark with a high of 6.9 per cent and ramifications for economic growth and interest rates.
In his mind, the higher than expected inflation surge will lead to slower gross domestic growth and in turn further rate rises than other analysts are anticipating – hitting 1.25 per cent by the end of the year – a significant uplift on the current level of 0.25 per cent.
“The risks are that the labour market remains stronger for longer, CPI inflation stays above the 2 per cent target well into next year and the Bank of England raises interest rates further in 2023,” Mr Dales said.
While higher energy prices pushed up inflation in the last few months of the year – a reflection of surging global energy costs – in turn causing household bills and transport costs to escalate, the picture in November was slightly different.
November’s inflation rate of 5.1 per cent saw increases in food inflation to 4 per cent from 2.5 per cent and hotels/restaurants inflation to 6.2 per cent from 5.2 per cent. Ruth Gregory, senior UK economist at Capital Economics, said they were offset by a fall in fuel and clothing and footwear inflation.
This left overall CPI inflation at 5.1 per cent, while core inflation, which excludes food, energy, alcohol and tobacco, may have nudged down to 3.9 per cent from 4 per cent.
While Ms Gregory expects inflation “to tread water for a couple of months”, the real trigger point will be higher energy prices from April 1, when Ofgem, the energy regulator, will increase its default energy tariff price cap.
Households are set to be £1,200 a year worse off as a result, with an uplift of about £500 to energy bills that have already risen significantly amid soaring wholesale gas prices in recent months.
“We think a rise in the region of 50 per cent is on the cards. That would add 2.1 percentage points to overall inflation and push it up to 6.9 per cent,” Ms Gregory said.
Failing energy firms could cause a further £100 to be added to energy bills, while a 1.25 per cent rise in National Insurance contributions will cost the average household £600 a year.
In the short-term, household budgets will be increasingly squeezed, as higher utility bills, and taxes hit home, with consumer spending set to dip, at least in the first quarter.
Beyond the first three months of the year, however, Mr Dales expects households to save a smaller share of their incomes as they put more towards everyday living costs.
While some individuals may look for a higher-paying role to offset their higher living costs, Tuesday’s robust employment figures, which showed unemployment down to 4.1 per cent in the three months to November, highlighted some concerning trends.
Job vacancies may be at an all-time high of 1.247, allowing jobseekers the luxury of being able to shop around for the right role, with pay growth, in nominal terms, well above the 2 to 3 per cent range seen before the pandemic.
But fast-rising inflation is eroding the benefit of higher pay for workers, with pay excluding bonuses flat in inflation-adjusted terms in the three months to November, its weakest performance since July last year.
Ramsey Baghdadi, consumer analyst at analytics company GlobalData, said if wages continue to fall behind the rising cost of living, there will be serious consequences for the foodservice industry.