Economy and Business News of August 17, 2022

Rising food prices pushed the annual inflation rate into double digits for the first time in four decades. Food prices alone rose 2.3 percent from June to July, the fastest monthly increase in 21 years, with notable increases among staples such as bread, cereals, milk, cheese and eggs.

The surge in box office prices comes as a contest to be Britain’s next prime minister has left the country in a leadership vacuum and political answers remain unresolved.

Overall, inflation rose faster than economists had expected, with prices up 0.6 percent from the previous month, the Office for National Statistics said on Wednesday. The annual inflation rate was 9.4 percent in June.

Rising prices have become an intense global problem that worries households and central banks from Australia to the United States, and is multiplying the challenges facing policymakers. Many countries are experiencing multi-decade highs in their inflation rates, with pandemic-related supply chain disruptions driving up the price of traded goods, and after Russia’s invasion of Ukraine triggered an energy crisis, especially in Europe.

Still, Britain’s inflation rate stands out. Prices are rising faster than in the United States (8.5%) and the largest Eurozone economies: Germany (8.5%), France (6.8%) and Italy (8.4%).

There are signs that inflationary pressures are becoming more persistent as price rises sink deeper into the British economy and as more businesses pass on the cost increases to their customers. Energy prices have been one of the main drivers of inflation for months, but rising food prices have also become a key factor.

Britain’s tight labor market is another risk. Companies are competing for workers by raising wages and offering big bonuses, making wage growth higher than recent historical averages and adding to inflationary pressures.

Credit…Frank Augstein/Associated Press

Stripping out food and energy prices, the inflation rate rose 6.2 percent in July, up from 5.8 percent the previous month. This rise in so-called core inflation “is a worrying sign for the potential longevity of the current inflation peak,” Sandra Horsfield, an economist at Investec, wrote in a note.

There are some signs that supply chain problems, which had been a major driver of commodity inflation, were easing, suggested by a fall in annual price growth for furniture, home goods and used cars

But “those positive aspects of this report are few and far between,” Ms. Horsfield.

Restaurant and hotel prices rose 9 percent in July, the fastest annual increase in 30 years, the statistics agency estimated. Service price increases, a broad category that includes cuts and public transportation and one less directly influenced by global prices, rose 5.7 percent in July, well above their 2 percent average in last decade

Inflation is still a couple of months away from its expected peak in the autumn, when the UK cap on household energy bills will rise. At that point, the economy could enter a long recession as high energy prices lead to a drop in consumer spending and hold back businesses, the Bank of England forecast.

The data released on Wednesday add to the woes of the central bank, which is tasked with returning inflation to its 2 percent target. Policymakers have raised interest rates since December to rein in spending as inflation has regularly beaten expectations. And this month, they raised rates by half a percentage point, the biggest jump in 27 years, to try to curb rising prices.

But the outlook for the economy has deteriorated. In the second quarter, economic output contracted slightly, losing momentum ahead of what is expected to be a difficult winter for many. There is a risk that the central bank will tighten monetary policy excessively in response to rising prices and worsen an economic downturn. Inflation could fall below the bank’s target as international influences on inflation ease and domestic price pressures ease amid a weak economy, the bank said.

“The mix of high short-term inflation and weak activity leading to a recession is a challenging context for monetary policy,” central bank governor Andrew Bailey said earlier this month.

However, the central bank is expected to continue raising interest rates as inflation rises, despite its recession warnings.

Credit…Andy Rain/EPA, via Shutterstock

For now, the relentless rise in the inflation rate is sounding increasingly loud alarms about a cost-of-living crisis, as the price of more goods, including groceries and services, rises. Households are being warned that the average energy bill could rise to £3,500 (about $4,240) a year by October, triple what it was a year ago.

“We buy less because we’re trying to save money,” said Ali Khan, a 40-year-old Uber driver who lives in south London. I used to spend £50 on food his family; now the same basket costs him £75. “The prices are going up and up every day,” he said Wednesday. “I’m very worried.”

As households wait for confirmation of the change in energy bills later this month, they are also waiting to hear who will be the next Prime Minister. The winner of the Conservative Party contest for the top job will not be known until September 5, and the current caretaker government is making no new commitments to ease the burden on households.

The next Prime Minister will be Liz Truss, the Foreign Secretary and current favorite, or the former Chancellor of the Exchequer, Rishi Sunak. Economic policy has been one of the main dividing lines between the two contenders, with Ms. Truss which prioritizes tax cuts to spark growth in the UK economy, rather than direct payments, and Mr. Sunak arguing that inflation must be curbed before taxes can be reduced.

“The biggest issue facing our country in the short term is how we’re going to get through this winter,” Mr. Sunak on Wednesday, answering questions from party members in Belfast. “We need to support vulnerable groups, those on low incomes and pensioners, directly with financial support, because a tax cut does not work for these people.”

Earlier in the day, Ms Truss said she wanted to “immediately” cut taxes and remove a green energy levy from energy bills. “What won’t work,” he said, according to The Guardian “handing out more money without dealing with the root cause” of energy security.

Anger and stress over the rising cost of living has continued unabated. This week, train operators and rail staff across the country plan to strike again over pay and working conditions. They will soon be joined by dock workers at some of the country’s largest ports and postal workers, who are walking off the job to demand wages more in line with inflation.

On average, wages across the country are growing more than twice as fast as the average in the decade before the pandemic, but are still not keeping up with prices. Adjusted for inflation, pay excluding bonuses fell 3 percent in the year to the second quarter, the statistics office said on Tuesday. It was a record low.

“The situation is dire for UK consumers, who are currently being squeezed from all sides,” Berenberg Bank economist Kallum Pickering wrote in a note. “Wages are not rising fast enough to offset rising inflation, but they are rising too fast” for the central bank’s liking, he added.

Euan Ward and Stephen Castle contributed to the report.


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About the Author: Chaz Cutler

My name is Chasity. I love to follow the stock market and financial news!