Inflation in the UK has reached double-digits for the first time since 1982, official data shows, after the consumer prices index (CPI) jumped by more than expected in July.
The Office for National Statistics reported that CPI stood at 10.1% in the 12 months to July, up from 9.4% in June. Economists had expected the latest inflation print to come in at 9.8%.
The Bank of England recently said inflation in the UK could peak at more than 13% while warning that the risk of recession is growing.
UK CPI over 10yrs
Source: Office for National Statistics
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said: “At 10.1% this is the highest peak for inflation since February 1982 when The Jam were at the top of the charts with A Town called Malice.
“Right now the Bank of England finds itself in a sticky situation, with little option but to keep raising interest rates to try and lower demand in the economy. Policymakers are in a jam because they know full well that this monetary policy squeeze risks pushing the UK economy into recession, if it isn’t there already. This boiling temperature will mean policymakers won’t easily be able to turn down the heat on those rate rises given their stated determination to put a lid on inflation and bring it back to its 2% target.”
The biggest contribution to the increase in July’s CPI came from food prices, with the prices of bread, cereals, milk, cheese and eggs rising the fastest. Energy, petrol and diesel costs also contributed.
Chris Beauchamp, chief market analyst at IG Group, warned the UK has a strong chance of falling into recession while there appears to be little sign of respite from the cost of living crisis.
“The continued surge in inflation, combined with the fall in real wages, means that it seems increasingly unlikely that the UK will avoid a recession. Food prices have surged, intensifying the cost of living crisis, but hard-pressed consumers can expect little relief,” he said.
“While the BoE will have to keep up the hiking pace it has now established, the heightened likelihood of a UK recession means the pound will continue to flail against the US dollar thanks to the yawning economic gulf between the two.”
Contributions to change in the annual UK CPI inflation rate between Jun and Jul 2022
Source: Office for National Statistics
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “Looking ahead, the headline rate of CPI inflation looks set to fall a little in August and September, as the recent fall in oil prices gets passed on to consumers at the petrol pump.
“Indeed, we think that motor fuel’s contribution to the headline rate will be 0.5pp smaller in September than in July, if the Brent crude price remains near its current $92pb level. But the headline rate then will soar to around 13% in October, when Ofgem will increase its default tariff price cap by about 80%.”
However, Pantheon Macroeconomics expects core CPI inflation to drop sharply towards the end of this year thanks to falling commodity and shipping costs, high inventories prompting companies to cut prices and slower wage growth if the slackness in the labour market increases.
“So while all businesses will be struggling with higher energy costs this winter, we expect month-to-month increases in the core CPI to moderate over the coming months and to revert fully to their seasonal norms by the start of next year,” Tombs said.
“This would help to ease the MPC’s fears about high inflation becoming ingrained and inflation expectations de-anchoring, and thus convince them to stop hiking bank rate sooner than investors currently expect.”