Inflation in the U.K. rose to a new 4-decade high in July as fueled food and energy costs continued to weigh on consumers’ pockets, new data released on Wednesday showed.
The consumer price index (CPI), which serves as a measure of the overall changes in consumer prices, rose by 10.1% on an annual basis, above the consensus estimates and the June CPI print of 9.4%. Core inflation, which strips out volatile food and energy costs, rose to 6.2% annually last month, up from 5.8% in June and above the estimated 5.9%.
According to the Office for National Statistics (ONS), mounting food prices were the main factor driving the annual inflation between June and July.
PwC retail strategy director Kien Tan said:
“Supermarkets have had little choice but to pass on price increases from suppliers, themselves contending with unprecedented inflation in raw material and ingredient input costs.”
This is especially true for categories like dairy as some reports suggest that the price of a pint of milk has more than doubled in certain stores year-to-date, added Tan.
The ONS report also showed real wages in the country dropped by 3% annually in Q2 2022, marking its steepest-ever decline. While average pay excluding bonuses rose by 4.7% in the U.K., that increase is largely overshadowed by the mounting cost of living.
Dan Howe, head of investment trusts at Janus Henderson, said:
“Today’s inflation figures serve as a further reminder to many UK households that they are facing a period of considerable financial hardship.”
Six Consecutive Rate Hikes... And Still Not Enough
U.K. inflation hit a new 40-year high even after the country’s central bank made six straight interest rate hikes to curb spiraling consumer prices, with the latest hike earlier this month being the largest single increase in 27 years. The Bank of England (BoE) expects the U.K. to fall into the longest recession since the global financial crisis in the fourth quarter of this year.
BoE also said it expects inflation to peak at around 13.3% in October, before starting to come down towards the 2% target. The new CPI print also adds further pressure on Conservative Party members Liz Truss and Rish Sunak, one of whom is set to succeed the former prime minister Boris Johnson on September 5.
Both will have to address rising prices of food and energy with the new projections indicating that the U.K.’s energy price cap could hit £4,266 ($5,170) annually in early 2023 from the current £1,971 mark. Analysts expect that figure to surge beyond £3,000 in October after the next CPI print.
The country’s energy watchdog Ofgem recently raised the energy price cap by 54% to address mounting costs. The cap is expected to increase further in October when annual household energy bills are expected to surge beyond £3,600 ($4,396).
Meanwhile, the borrowing costs in the UK currently stand at 1.75% after the Monetary Policy Committee (MPC) voted for the first half-point increase since the Bank of England’s independence in 1997.
“Inflationary pressures in the United Kingdom and the rest of Europe had intensified significantly since the May Monetary Policy Report and the MPC’s previous meeting. That largely reflected a near doubling in wholesale gas prices since May, owing to Russia’s restriction of gas supplies to Europe and the risk of further curbs.”
The MPC added it expects real wages to fall and CPI inflation to increase further in the near run. The labor market in the country also remains tight, with the unemployment rate reaching 3.8% in the second quarter and vacancies remaining at record-high levels. The committee expects underlying nominal wage growth to be greater than in the May period over the first half of the outlook period.
‘Difficult Job’ for BoE
Quilter Cheviot’s analyst Richard Carter expects the Bank of England to implement another 50-basis points interest rate hike at the next meeting to rein in inflationary pressures, adding the worst of the cost-of-living crisis is yet to come. He argues that “the Bank of England will continue to have a very difficult job on its hands.”
Andrew Bailey, Governor of the Bank of England, blamed the soaring inflation on the ongoing war in Ukraine. However, he said the war will not prevent the central bank from reaching its goal to bring inflation back to the 2% target.
Bailey noted that he is aware of the extent of the impact inflation will have on the cost of living in the U.K. He acknowledged that “inflation hits the least well-off hardest” but emphasized the importance of acting right away before the situation becomes even grimmer.
The central bank plans to start active government bond sales worth a total of £10 billion ($12.1 billion) as of September after receiving the final nod from the lawmakers.
Looking forward, the bank provided a gloomy outlook for the U.K.’s economic growth, saying that the latest surge in gas prices further affected the economy’s outlook in the U.K. and Europe.
Therefore, the MPC now expects the U.K. to fall into recession in the last quarter of the year and estimates it will last five quarters as real household post-tax income falls significantly in 2022 and 2023.
“Growth thereafter is very weak by historic standards. The contraction in output and weak growth outlook beyond that predominantly reflect the significant adverse impact of the sharp rises in global energy and tradable goods prices on U.K. household real incomes,” the MPC said in its monetary policy report.
These low projections underscore how dismal the U.K.’s economic outlook is compared to its global peers. At the same time, many UK stock trading apps are reporting a growing number of users, as the current UK inflationary environment isn’t detering new traders from entering the equities trading market.
Conclusion
The UK CPI data exceeded expectations again to set a new 4-decade high. Investors now have growing concerns that the latest set of CPI data will force the BoE to be even more aggressive in tightening.
More worryingly, the more aggressive the BoE is, the sharper recession is likely to be as a result. Hence, it is unlikely that the stock market will be able to sustain extremely aggressive central bank tightening coupled with a high risk of a sharp recession.