Annual inflation broke the 10% mark earlier than expected by financial markets and the Bank of England, but last month’s sharp rise in the cost of living isn’t really a big shock.
Over the past year, the number has been consistently higher than forecast, but it won’t just be the jump in the headline figure for the consumer price index (CPI) – from 9.4% in June – that will be a cause for concern.
First of all, the Office for National Statistics (ONS) said price increases were evident across the board. The ONS divides the CPI into 12 separate categories, and inflation rose in nine of them last month. Food prices rose particularly sharply, but clothing and shoes, gastronomy and hotels as well as leisure and culture also increased.
In addition, more bad news will follow. The price of goods leaving factory gates – an indication of pipeline inflation – rose more than 17% in July, the highest rate in 45 years.
Annual inflation is clearly not peaking yet, and if anything, the Bank of England’s forecast could prove optimistic from a peak of 13.2% in October.
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Threadneedle Street digs under the headline CPI number to look at measures of core inflation. There was bad news here too. Inflation excluding food, fuel, alcohol and tobacco was 6.2% in July compared to 5.8% in June. Services inflation, which gives an indication of domestically generated price pressures in contrast to global forces, was 5.7% in July, down from 5.2% in June.
The strength of headline and underlying inflation makes it more likely that the Bank’s Monetary Policy Committee will follow its 0.5 percentage point rate hike earlier this month with a similarly large step at its next meeting in September.
inflation graph
At the same time, the risks of an economic hard landing have increased as the widening gap between prices and wages is leading to a sharp decline in consumers’ purchasing power.
The ONS reported on Tuesday that regular real wages – excluding bonuses – fell at a record 3% – but that was based on a different measure of the cost of living than the one used by the government to assess whether it was a an inflation of 2% is target being hit.
Using the government’s preferred metric, real incomes fall by more than 5% – unprecedented in today’s world. The pressure on the next prime minister to ease a deepening cost-of-living crisis has just stepped up a notch.
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