It is the Bank of England’s job to hit the government’s 2% inflation target, so from the perspective of Threadneedle Street policymakers there are a number of worrying aspects to the latest cost of living figures.
Let’s start with the obvious: the annual inflation rate rose from 6.2% to 7% last month and is now at its highest level since early 1992: that’s a long way north of the official target.
Then there’s the speed at which price pressures have surfaced. A year ago, the annual inflation rate was only 0.7%: the increase in magnitude in the 12 months since is unprecedented in modern times.
The pickup in inflation is also broad-based. Clearly, Russia’s invasion of Ukraine has given an added twist to the problem by jacking up energy costs but there is more to it than that. Food, eating out, clothing and furniture have all become more expensive.
What’s more, there is worse to come. When the April inflation figures are released next month they will include the 54% increase in the energy price cap – which alone will add about 1.8 percentage points to the annual inflation rate.
Even allowing for the 5p-a-litre reduction in fuel duty announced by the chancellor, Rishi Sunak, in his spring statement, the annual inflation rate in April is going to climb well above 8% and – given that in every recent month the figure has surprised on the upside – could well be about 9%. Inflation has not been that high since the early 1980s.
Finally, high inflation is going to stick around for a while. While in the summer there should be some reduction in the annual rate, there is likely to be another rise in the autumn when the energy price cap is again adjusted. Inflation will remain at 7% or above for the rest of 2022.
Britain is not alone in its predicament. The fact that annual goods inflation (9.4%) is running at more than double the rate of services inflation (4%) is evidence that there is a global dimension to the cost of living crisis.
Even so, the strength and persistence of inflation creates economic and political problems for the government. Stagflation – a toxic combination of stagnant output and rapidly rising prices – is a racing certainty but there is also a risk of an intensifying squeeze on living standards caused by prices rising faster than wages, driving the economy into recession.
Sunak will face demands to do more to help mitigate the impact of price rises. A combination of falling real incomes plus Partygate spells real trouble for Boris Johnson’s administration, and raises further questions about why the chancellor failed to act more decisively on the cost of living crisis in last month’s mini-budget.
One reason why the onus is on Sunak is that voters can expect little assistance from the Bank. The next meeting of its monetary policy committee in early May will coincide with the 25th anniversary of Gordon Brown’s decision to grant Threadneedle Street operational independence. Despite the obvious risks of harming an already weakening economy, the Bank is expected to mark the occasion by raising interest rates for a fourth meeting in row.
Testing time for Tesco
Tesco says there are “significant uncertainties” weighing on its business – an understatement if there ever was one.
No question, 2022 is shaping up to be a more testing year for Britain’s biggest supermarket chain than last year was. The cost of food is going up as is the company’s wage bill. Consumer confidence is at a low ebb and competition from Lidl and Aldi is – as ever – intense.
But even in tough times people still have to eat and, on past form, households will respond to a hit to their spending power by eating out less and eating in more. During the warmer summer months, there will also be a temptation for workers for whom the option is available to work from home in order to save on travel costs.
Tesco says it will respond to a time of heightened cost-consciousness by prioritising price competitiveness – hence its warning that earnings will suffer this year. In reality it has little choice but to endure a profit margin squeeze, since the alternative would be to cede market share to its low-cost rivals.
