Inflation hit a 40-year high last month, driven by the jump in electricity and gas prices as the higher energy price cap came into effect.
The annual rate of CPI inflation rose to 9 per cent in April, up from 7 per cent in March, according to the Office for National Statistics (ONS). It is the highest level since 1982. City economists had forecast a rise of 9.1 per cent.
The cost of household utilities rose by an average of £700 in April.
Grant Fitzner, the ONS’s chief economist, said: “Around three quarters of the increase in the annual rate [of inflation] this month came from utility bills.”
Liz Truss, the foreign secretary, told Sky News that jump in the cost of living showed that Britain was facing a “very, very difficult economic situation” and “serious global headwinds”.
Rishi Sunak, the chancellor, who is under pressure to introduce measures to relieve the squeeze on households, said: “We cannot protect people completely from these global challenges but are providing significant support where we can, and stand ready to take further action.”
The FTSE 100 edged up slightly this morning to 7521.45, up 0.08 per cent or 5.5 points. The pound slipped against the dollar and the euro, down 0.4 per cent to $1.2432 and 0.2 per cent to €1.1817 respectively. Brent crude was up 0.5 per cent at $112.45 a barrel.
The surge in global energy prices, which have been exacerbated by the war in Ukraine, accounts for the lion’s share of price rises affecting UK households. Even before the war, inflation was running at multi-decade highs after the lifting of Covid-19 lockdown measures stoked costs for transport and energy.
Pay packets were also hit by a rise in National Insurance contributions last month, leading some economists to warn that the Bank of England will have to continue to raise interest rates to lower expectations that inflation will remain high. The risk for policymakers is that the rapid pace of inflation becomes “embedded in pay negotiations, which will put additional pressure on prices to rise”, according to Yael Selfin, chief economist at KPMG UK. Inflation will stay close to this level until the end of the year, she added.
The Bank of England’s rate-setters expect inflation to peak at more than 10.2 per cent in October when energy bills are calculated for the second time this year.
The governor of the central bank told MPs on Monday that Britain faces an “apocalyptic” rise in food prices because of Russia’s invasion of Ukraine, which has disrupted exports from the country.
Andrew Bailey, who took over in 2020, said he feels “very uncomfortable” because rises in inflation were being driven by shocks external to the UK, including the war and supply chain issues caused by lockdowns in China.
Ukraine, which is one of the world’s biggest producers of wheat and cooking oil, is struggling to export food due to the conflict, Bailey told MPs on the Treasury select committee this week. “That is a major worry not just for this country but for the developing world,” he said. Exports of grain, including wheat and maize, have fallen steeply since the Russian invasion. Wheat prices hit a 14-year high in March.
The Bank of England raised interest rates to their highest since the financial crisis at 1 per cent this month and its expected to raise it further, but has warned that 80 per cent of present inflationary pressures are driven by global factors beyond rate setters’ control.
The central bank is also facing a slowdown in UK growth. It expects the economy to slow sharply at the end of the year and it could slip into recession next year, shrinking by 0.25 per cent. That is down from the Bank’s previous forecast of 1.25 per cent growth.
Inflation will drop slightly by summer this year, according to forecasts by the Pantheon Macroeconomics consultancy. Samuel Tombs, chief economist, said the rate of price rises will fall to around 8.5 per cent in August because there were significant price rises in August last year when businesses opened after lockdown.
“We continue to think that the headline rate of [consumer prices] inflation will fall quickly in 2023, in response to recent falls in shipping costs, easing demand for goods that were desired during the pandemic, and stabilising energy prices,” Tombs said.
Paul Dales, chief UK economist at Capital Economics, said the rise “heaps more misery on households and highlights the pressure on the Bank of England to keep raising interest rates”.
He said: “Things are going to get worse before they get better. We think the combination of a further 30 per cent leap in the Ofgem price cap in October and increases in other costs (inputs and wages) will mean CPI inflation rises to around 10 per cent in October. Inflation will probably fall back after that, but the tight labour market and high wage growth suggests to us it won’t drop back to the 2 per cent target on its own accord. We think interest rates will need to rise from 1 per cent to 3 per cent to do the job.”