The increase is more than double the pace of basic wage growth, squeezing consumer spending power at the sharpest pace on record. The pain is set to intensify, with the Bank of England predicting double-digit inflation by October when energy bills are almost certain to jump again.
There was evidence of more generalized inflation, with a 6.7% jump in food and non-alcoholic drink prices. The cost of recreation and culture rose 5.9%, the largest increase since at least 2006, and restaurant and hotel prices were up 8%. Part of that was due to value added tax reverting to the normal rate after the pandemic. Furniture and household equipment rose 10.7%.
The cost-of-living crisis already has amplified the political debate about how to handle a series of shocks hitting the UK. Prime Minister Boris Johnson’s Conservatives government has targeted relief at those with jobs, while the Labour opposition is calling for an emergency budget to help pensioners and people on benefits.
“Countries around the world are dealing with rising inflation,” Chancellor of the Exchequer Rishi Sunak said in a statement. “We cannot protect people completely from these global challenges but are providing significant support where we can, and stand ready to take further action.”
The Pound came close to reversing yesterday’s rebound on global de-risking following Jerome Powell’s comments on persisting with policy tightening. Even though the price of oil was down $3 today, the weakness of the Pound has exacerbated the impact of the advance for European consumers. Brent crude in Pounds is still consolidating above the 2008 and 2012 peak. A sustained move back below £70 will be required to confirm a change of trend.
Last week Spain and Portugal introduced price controls on fuel. There is nothing any energy importer can do to mitigate the negative impact of rising fuel prices. The lack of adequate supplies of natural gas, oil, coal and spare electricity generating capacity are in no way influenced by interest rates. The large debt load and floating rate mortgage markets mean higher rates will cause more harm to consumers than rising food prices. That puts central banks in a very tight position. The answer is price controls.
This is exactly the kind of political solution that was attempted in the early 1970s. They provide short-term relief but do nothing to quell the underlying inflationary bias. When the cost of maintaining the controls becomes too expensive, they are abandoned, and prices ramp higher. The inflation of the 1970’s came in waves with short sharp economic boom and bust cycles. It is looking quite likely this is what we can expect from this decade too.