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UK inflation set to hit 9.1% as cost of living bites

·Finance Reporter, Yahoo Finance UK
·5-min read
Inflation  Clubcard branding is seen inside a branch of a Tesco Extra Supermarket in London, Britain, February 10, 2022. Picture taken February 10, 2022. REUTERS/Paul Childs
Inflation is set to hit 11% in autumn. Photo: Paul Childs/Reuters

Inflation has edged above an already 40-year record high last month according to consensus prediction of Wednesday’s new inflation figures from the Office for National Statistics (ONS).

Economists polled by Reuters expect UK consumer price growth to have hit 9.1% on an annual basis in May. That figure would represent little change from the 40-year high of 9% reached in April but it leaves households already suffering the biggest hit to their incomes in decades in a tighter squeeze.

Even the Bank of England admits that inflation will hit double digits in autumn, as UK households face another steep uptick in the energy price cap.

Inflation is soaring
Inflation is soaring

The BoE now predicts it will hit 11% this autumn. It had previously estimated that consumer price inflation would hit 10% – far over its 2% target. This new forecast shows that households face even more pain, with real wages already lagging inflation.

Read more: Average UK food shop rises by £380 a year

Economists at Deutsche Bank said May prices would have kept inflation at multi-decades highs.

"We see May CPI edging up to 9.2% y-o-y, with core CPI slowing to 6% y-o-y. We expect RPI to move to 11.5% y-o-y. Current inflationary pressures remain tied mainly to food and energy inflation, while we see services inflation continuing to firm,” Sanjay Raja, senior economist at Deutsche Bank, said.

Our updated inflation projections now have inflation (CPI) averaging just under 9% y-o-y this year, with Q3 and Q4 CPI averaging over 10% y-o-y. Our 2023 projections have also been upgraded, given rising services, food and oil prices. We now see CPI averaging closer to 6% in 2023, with RPI averaging 11.1% y-o-y this year and 7.7% y-o-y in 2023,” he added.

The UK’s cost of living crunch is being driven by a combination of higher energy prices, a tight labour market and historic petrol prices.

Energy bills are set to soar again. Chart: Yahoo UK
Energy bills are set to soar again. Chart: Yahoo UK

Connor Campbell at NerdWallet said: “Clearly, the government must go beyond one-off financial support and develop a long-term economic recovery plan to help the UK emerge from its current economic predicament. Not all households, however, can afford to wait for such measures to be announced.

“Certain steps can be taken if you are seeking assistance. Free support is available in the form of debt charities StepChange and Citizen’s Advice, if you want to air your concerns or take steps to develop a financial recovery plan, while the Trussell Trust has a postcode tool that can allow you to find a food bank in your area. Price comparison sites could also offer some solutions, by allowing households to compare prices for a variety of necessities, from groceries to energy providers.

“There is no quick fix to the cost-of-living crisis. However, Britons should know that there are tools available to provide some short-term relief. And such action could set them on the right track towards regaining some control over their finances.”

Read more: Interest rates: Bank of England's Huw Pill sees further hikes in coming months

Myron Jobson, senior personal finance analyst at Interactive Investor, said: “Inflation is at its highest levels in 40 years and the crippling squeeze on finances is set to get worse in the coming months. The jump in inflation by 2 percentage points from 7% to 9% in April was almost entirely driven by the rise in Ofgem’s energy price cap, which led to a record energy bill increase of 54%. A similar jump appears unlikely for May, but the persistence of factors including the impact of the conflict in Ukraine and post COVID supply chain bottlenecks is likely to have pushed inflation higher.

“Many of us are feeling the effects of inflation by how much we spend on food, energy bills and at the nation’s forecourts to fuel our cars. We each have an inflation number that is unique to us and could be far higher than the catch-all headline figure. As such, keep tabs on your spending to get a better idea of how exposed your back pocket is to inflation remains crucial.”

To illustrate the scale of inflation, Interactive Investor produced a chart outlining the percentage increase in prices since 2020 across three key consumer inflation categories: energy, food and clothing.

How the cost of living in the UK has changed. Chart: Interactive Investor
How the cost of living in the UK has changed. Chart: Interactive Investor

Lee Wild, head of equity strategy at Interactive Investor, said: “The 80s is in fashion again. Top Gun is back in the cinema, Kate Bush is number one, and inflation is at its highest since 1982. There’s a conflict going on too, which threatens global food security like no time since the Second World War.

“Early in 2021, UK inflation was running at less than 1%. Now it’s 9%, a 40-year high! Costs in America are 8.6% more than a year ago, and in the eurozone they’re up a record 8.1%. Shockingly, the cost of living is likely to increase even further in the months ahead.

Read more: UK firms holding back on raising prices despite record high inflation

“Who to blame? Well, the war in Ukraine has made things considerably worse, but it wasn’t Putin’s march West that triggered the surge in global commodity prices, or the cost-of-living crisis. Energy prices had begun creeping up over a year ago following an unusually cold winter and a surge in global demand for gas after the pandemic. Wind hasn’t created as much power as expected either. Labour shortages – remember when lorry drivers were like hen’s teeth? – and more expensive fuel, increase transport and distribution costs for businesses have also added to inflationary pressures.

“Most recently, the Institute of Grocery Distribution predicts food prices will rise 15% over the summer. A massive reduction in wheat exports out of Ukraine and Russia is driving up the cost of grain, so watch the price of bread and pasta rocket. Anything fed on grain, like chickens, will get significantly more expensive too.”

Watch: How does inflation affect interest rates?

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