Yahoo Finance Inflation crisis set to last until next Christmas, warns Andrew Bailey
Britons face a cost of living crisis until the end of next year, the Bank of England has warned, after inflation crashed through forecasts to its highest level in 30 years.
The official measure of rising prices rose to 5.4pc last month, its highest level since March 1992. The figures came as a further blow to Boris Johnson’s beleaguered premiership, as Conservative backbenchers stepped up calls for him to scrap tax rises and take action on soaring energy bills.
In a trend that alarmed economists, the latest rise in the Consumer Prices Index (CPI) was primarily driven by increasing food prices, a sign that inflation is becoming embedded on the front lines of the economy. Earlier hopes of a “transitory” effect in the wake of the pandemic have largely been abandoned.
Andrew Bailey, the Governor of the Bank of England had previously made such suggestions but was on Wednesday questioned by MPs and said the effects of higher gas prices could be felt for 18 months. He blamed rising tensions between Russia and Ukraine for a “big shift” keeping inflation higher for longer.
The Governor warned that high gas prices are expected “until the tail-end of next year”, abandoning earlier hopes of respite this summer.
He told the Treasury select committee: “If we are going to have a more elevated gas price, that is a source of concern. I have to be honest.”
December saw the fastest month-on-month rise in grocery bills since 2012, of 1.3pc, driven by higher costs for bread, meat and vegetables.
CPI is now expected to hit 7pc in April, just as workers and firms also face a £12bn National Insurance raid from the Chancellor. Experts warned the impact will be so great that a worker on £50,000 would need a 10pc annual pay rise just to avoid a real-terms salary cut.
The data also signalled further strain on the Government’s own finances after the Retail Prices Index (RPI) jumped to 7.5pc - the highest since March 1991. More than a quarter of the Government’s £2.3 trillion debt pile is linked to changes in RPI. The Treasury paid £4.5bn in interest in November, £400m more than a year earlier.
The Bank is expected to raise interest rates again in February, from 0.25pc to 0.5pc, to fight inflation. Fears are mounting in Threadneedle Street that rising prices are feeding into higher wage demands, threatening an inflationary spiral.
Mr Bailey added that the Bank’s agents were “beginning to see some evidence of this" as shortages prompt inflation-busting deals including an 11pc pay rise for some council binmen. He added: “Please don’t think we don’t think these are serious pressures. They are.”
Unemployment has dropped to pre-Covid levels at 4.1pc but the Governor also warned that the inflation surge would eventually cost jobs.
He said: “If you get pressure on cost of living, pressure on real earnings, that will tend to restrain demand in the economy... and it could eventually of course lead to higher unemployment and that would bring inflation down.”
The living costs crunch is set to worsen in April from an expected 50pc rise in the energy price cap to almost £2,000 per year with ministers considering intervention to ease the pressure.
Consumers have been protected from some of the pain of inflation so far by the energy price cap but are beginning to see the effects of high wholesale gas prices elsewhere, warned Kitty Ussher, chief economist at the Institute of Directors.
She said: “What is of particular concern is that the change from November has come mainly from an increase in the price of food.
“Not only does this provide additional evidence that inflation is becoming endemic rather than transitory, it also bodes ill for households facing multiple rises in the cost of living this spring.”
Sam Tombs, economist at Pantheon Macro, said the faster-than-expected acceleration in prices leaves the Bank’s rate-setters “little choice but to hike rates again in February”.
Experts have warned rate hikes in 2022 are likely to lift average mortgage rates from 1.5pc now to 2.4pc by the end of the year, adding close to £100 to monthly payments on a typical £200,000 home loan with a 25-year term.ation rate to peak at around 7pc in April but remain well above the Bank’s 2pc target throughout 2022 and 2023.
