Inflation hits new 40-year high at 10.1%

Inflation has once again broken records with a new 40-year high recorded last month, as the Consumer Price Index (CPI) hit 10.1% in the 12 months to July 2022, up from 9.4% in June. 

According to the Office for National Statistics (ONS), the biggest contribution to this figure was rising food prices, which rose by 2.3% between June and July 2022, the highest increase in 20 years.

The annual inflation rate of food and beverages prices now runs at 12.7%, up from 9.8% in June. The annual rate of inflation was last higher in August 2008, when it ran at 13.2%.

This was in part fuelled by significant price rises in bread and cereals, milk, cheese and eggs, where prices for shop-bought and delivered milk, cheddar cheese and yoghurts “increased notably”. 

It comes as the ONS yesterday reported that regular pay in the UK fell by a “record” 3% in the quarter ending June 2022, the steepest decline since records began two decades ago. 

Not accounting for inflation, growth in regular pay, excluding bonuses, would be 4.7% in April to June. However, most pay rises failed to match June’s rate of inflation at 9.4%, leading to the overall fall in real terms. 

Commenting on the figures, ONS chief economist Grant Fitzner said: “A wide range of price rises drove inflation up again this month. Food prices rose notably, particularly bakery products, dairy, meat and vegetables, which was also reflected in higher takeaway prices.  Price rises in other staple items, such as pet food, toilet rolls, toothbrushes and deodorants also pushed up inflation in July. 

“Driven by higher demand, the price for package holidays rose, after falling at the same time last year while air fares also increased. The cost of both raw materials and goods leaving factories continued to rise, driven by the price of metals and food respectively.”  

Debapratim De, senior economist at Deloitte, said: “With inflation above 10% and widely expected to rise further as energy bills increase, base interest rates look fairly low at 1.75%. We expect swift action from the Bank of England with the base rate potentially doubling by this time next year.

“As the Bank moves aggressively to crush double-digit inflation, we are forecasting a 1.6% contraction in activity between this autumn and the next. This is a much smaller contraction than the pandemic but, with a sharp squeeze on consumer spending power and likely rise in unemployment, will feel significantly disruptive.”

Jake Finney, economist at PwC, said: “Compared to other peer economies – France, Italy, Germany and the US – the UK now records the highest rate of harmonised inflation and is the only advanced economy now in double digits. We expect inflation to continue rising in the next few months, reaching its peak in January 2023 as the energy price cap is uplifted once more and household energy bills potentially exceed £4.2k a year. Though some of this impact could potentially be offset by additional government support.”

Suren Thiru, Economics director at ICAEW, concluded: “Red-hot inflation is suffocating the UK economy, and with the peak some way off, the risk of recession is rising. The latest increase means that the cost-of-living crisis is escalating as inflation continues to outstrip pay growth, eroding people’s incomes. Companies’ ability to operate is also under significant pressure as they see their own costs surge and customer demand wilt.

“Inflation may moderate a little in August as strong base effects caused by the comparison with August 2021, when inflation leaped from 2.0% to 3.2%, impacts the calculation. However, with eye-watering increases in energy bills due from October, inflation is on track to peak at over 13%.” 

He added: “With inflation soaring, another half-point interest rate rise in September is very much on the table. However, with the looming recession likely to help bring down inflation, the case for continuing to tighten monetary policy should diminish.”