UK Inflation Tops 10 Percent, Highest in 40 Years

Consumer price inflation in Britain jumped to 10.1 percent in July, the highest since February 1982, making it the first major rich economy to see price growth hit double digits as surging food costs intensified a squeeze on household budgets. The increase from June's annual rate of 9.4 percent was above all economists' forecasts in a Reuters poll and fueled bets by investors that the Bank of England (BoE) will keep on hiking interest rates quickly. Despite warning this month that a recession was likely, the BoE raised its key rate by 0.5 percent to 1.75 percent—its first half-point rise since 1995. It saw inflation peaking at 13.3 percent in October, when regulated household energy prices are next due to rise. Citi economist Benjamin Nabarro said that, after the latest figures, he now expected inflation to peak above 15 percent early next year. "With the Bank focused on signs of more persistent inflationary pressures, we think a hawkish reaction is now all but inevitable," he added. Most economists in a Reuters poll earlier this week already expected the BoE to raise interest rates by a further half point to 2.25 percent after its next meeting in September. Two-year British government bond yields—which are sensitive to interest rate expectations—hit their highest since 2008 and investors priced in BoE rates peaking at 3.75 percent around March 2023, up from 3.25 percent previously. Britain is not alone in facing soaring price growth but it is the first in the Group of Seven economies to experience inflation above 10 percent. There are signs too that it will struggle with rising inflation for longer than other economies, including peers in Europe, where energy prices have leapt following Russia's invasion of Ukraine. Many economists believe U.S. inflation has already topped out after it dropped to 8.5 percent in July from a four-decade high of 9.1 percent in June. British Finance Minister Nadhim Zahawi said fighting inflation was his top priority and the government was working on options to reduce household energy bills. Wednesday's figures from the Office for National Statistics (ONS) showed that prices rose 0.6 percent in July from June on a non-seasonally adjusted basis. A 12.6 percent rise in annual food prices—the biggest since 2008—was the main cause of the jump in CPI inflation from June to July, while higher energy and petrol prices were the main driver over the year as a whole. Takeaway meals cost more, as did package holidays. The annual rate of retail price inflation—an older measure which is still widely used in commercial contracts and to set rail fares and government bond payments—hit its highest since March 1981 at 12.3 percent. Energy Bills to Leap Surging energy prices in Europe are the main driver of inflation and are likely to tip Britain into a lengthy, if shallow, recession, later this year, according to the BoE. However, there were some hints in the data that future inflation pressure might be starting to abate. Although the prices charged by factories rose by the most since 1977, jumping by 17.1 percent, the increase in prices paid by factories cooled slightly, dropping to an annual 22.6 percent from June's record 24.1 percent. In month-on-month terms, input prices rose by only 0.1 percent, the smallest increase so far in 2022, partly caused by weaker global demand for steel and a fall in crude oil prices as economic growth slows around the world. Economists also said global shipping and commodity prices were beginning to fall as COVID-19 supply chain bottlenecks eased, which could cause inflation to slow around the end of 2022. "This would help to ease the Monetary Policy Committee's fears about high inflation becoming ingrained ... and thus convince them to stop hiking Bank Rate sooner than investors currently expect," said Samuel Tombs of Pantheon Macroeconomics. The forecasts that Britain's inflation problem will last longer than in other countries stem in part from price regulations that mean energy companies must wait before passing higher wholesale costs on to consumers.