The annual inflation rate crossed the 10% mark earlier than expected by financial markets and the Bank of England, but the sharp rise in the cost of living last month is hardly a shock.
Over the past year, the figure has been consistently higher than expected, but it won’t just be the jump in the headline consumer price index (CPI) figure – up from 9.4% in June – that will be a source of concern.
For starters, the Office for National Statistics (ONS) said price increases were evident just about everywhere. The ONS divides the CPI into 12 separate categories, and in nine of these inflation rose last month. Food prices rose particularly strongly, but there were also increases in clothing and footwear, restaurants and hotels, and leisure and culture.
Plus, there’s clearly more bad news to come. The price of goods leaving factory gates – an indication of ongoing inflation – rose more than 17% in the year to July, the highest rate in 45 years.
The annual inflation rate has clearly not yet peaked and the Bank of England’s forecast of a peak of 13.2% in October could turn out to be optimistic.
Threadneedle Street digs under the headline CPI figure to examine measures of underlying inflation. Here, too, there was bad news. Inflation excluding food, fuel, alcohol and tobacco stood at 6.2% in July, against 5.8% in June. The services inflation rate, which provides an index of domestically generated price pressures as opposed to global forces, was 5.7% in July 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 hike in interest rates earlier this month with a similar sized move. when it meets again in September.
At the same time, the risks of a hard landing for the economy have increased as the ever widening gap between prices and wages leads to a sharp drop in consumer purchasing power.
The ONS reported on Tuesday that regular real wages – excluding bonuses – were falling at a record rate of 3% – but this was based on a different cost of living measure to that used by the government to assess whether its inflation of 2 % the target is hit.
Using the government’s preferred measure, real incomes fall by more than 5%, which is unprecedented in modern times. The pressure on the next Prime Minister to ease a deepening cost of living crisis has just escalated.