The UK annual inflation rate surprised to the upside again with a new three-decade high CPI point of 7% in March, compared to 6.2% in February, according to new data by the Office for National Statistics (ONS) published on Wednesday 13 April.
The hot inflation reading follows UK labour market ONS data on Tuesday 12 April, which showed the UK unemployment rate nudged back down to pre-pandemic levels in the three months to February. Last week, UK retail sales for March, published by the British Retail Consortium (BRC), showed weakening momentum and sales levels supported by higher prices, underscoring high street inflationary forces. Taken together, these three data points indicate a fourth consecutive increase rates hike by the Bank of England (BoE) next month.
UK annual inflation soared tenfold to 7.0% in March, in a successive 30-year high, and ahead of the 6.7% consensus forecast. It is a stark contrast to the equivalent annual CPI inflation reading of just 0.7% in March 2021. Surging fuel prices was the primary catalyst. Motor fuel prices spiked by 30.7% in the year to March, the highest annual rate on record. Elsewhere, food prices rose by 5.9% on the year, the highest annual rate since September 2011.
Ruth Gregory, senior UK economist at Capital Economics, said: “It’s no secret that inflation is going to rise even further in April, with the 54% leap in utility prices set to add a whopping 1.6 points to inflation. We think the result will be a rise in CPI inflation to around 8.5% in April. And while we suspect April could mark the peak, we think inflation will remain above 7% for most of 2022 and above 3% for most of 2023. With high inflation feeding into price/wage decisions, we think the Bank of England will have to raise rates further than it expects, perhaps to at least 2% next year.”
The UK unemployment rate declined fractionally (0.2%) to 3.8% over the three months to February, according to separate ONS data, back to pre-pandemic lows last seen in 2019. The ONS said retirees, people opting to look after family, and the long-term sick continued to shrink the labour market. The impact of robust demand and diminished supply in the labour market pushed up vacancies in the first quarter to another record high of 1.28m, although the growth rate continues to moderate. Upward pressure on wages remains, but increases are failing to keep pace with spiralling prices.
Growth in average earnings excluding bonuses nudged up to 4% in the 14 months to February, well below the annual inflation rate, which was at 6.2%. However, real inflation-adjusted average total earnings growth (including bonuses) was 0.4%, while regular pay fell on the year at -1.%. The data shows a sharp contrast between soaring household prices and wages that are not only failing to keep pace, but in real terms, and excluding bonuses, are in decline. Unfortunately, worse is yet to come. The Office for Budget Responsibility (OBR) forecasts inflation will push to a 40-year high of 8.7% in the fourth quarter of 2022, which will squeeze real incomes more as prices soar higher. This is underscored by the OBR’s inflation forecasts which point to the largest fall in living standards since the 1950s. In this context, the government’s tax increases from this month will further weaken real household incomes, which explains the darkening outlook for retail sales.
Total UK retail sales increased by 3.1% in March, the slowest growth rate this year, according to the British Retail Consortium (BRC). The attenuating sales momentum suggests household budgets are under strain from rising costs. There is a suggestion that part of the March sales increase is owed to higher prices rather than simply volume of sales, which total food sales decreased by 2.6%. It underscores the tight spot retailers are in. Retailers must balance the degree to which higher costs are absorbed and passed onto customers in light of weakening consumer demand.
Difficult trade-offs for Old Lady of Threadneedle Street
Policymakers want to avoid high inflation becoming entrenched as external headwinds – namely, Russia’s invasion of Ukraine on energy prices, Covid-19’s impact on public and corporate finances, and the effects of Brexit’s impact on EU trade – risk cementing higher broad-based inflation and supply chain disruption in a negative feedback loop.
Ultimately, inflation risk and the ‘cost of living’ squeeze is a greater concern than the growth slowdown. As a result, further monetary tightening is expected to follow, even at the risk of further demand destruction which will exacerbate weakness in retail sales in the months ahead. Markets expect interest rates to increase by another 25 basis points 1% at May’s Monetary Policy Committee (MPC) meeting and up to 1.75% to 2.0% in 2023.