Britain’s economy is facing a toxic mix of inflation and recession, amid the worst emergency for living standards in a generation.
Despite the cap on energy bills put in place by the government last month, households came under renewed pressure as inflation rose to the highest rate since October 1981. Even with the limit for average bills at £2,500 for a typical household, headline inflation topped 11% for the first time, reflecting the surge in energy bills from a year ago and the rocketing cost of a weekly shop.
On the eve of the chancellor’s autumn statement, this will add to the headache for Jeremy Hunt as he pushes to balance the books, while there are renewed questions to answer for the Bank of England.
Such is the scale of the crisis that Britain experienced as much inflation in one month as Threadneedle Street considers reasonable for the whole year, with a 2% monthly rise. Meanwhile, the poorest are bearing the brunt of the inflation shock triggered by the Covid pandemic and Russia’s war in Ukraine.
Lower-income families spend a larger share of their budgets on energy and food, exposing them most to the 130% annual jump in gas prices, a 66% jump in electricity, as well as food and drink inflation of 16.4% – the highest since Elvis Presley was topping the charts in September 1977, a month after his death.
Despite the bad news, it could have been worse without the government’s price guarantee, with the ONS estimating that a headline inflation rate of 13.8% could have been breached. There are also hopes that October could mark a turning point in the battle against inflation.
Economists anticipate that a combination of a weaker economy, cooling wholesale energy prices and the waning impact of global supply shocks may lead to an easing of price pressures. With Britain on the brink of a lengthy recession and rising unemployment, this stands to reason.
Households can, however, expect to face continued pain for some time. Although the fall in energy prices in wholesale markets should feed through to consumer prices, they still remain significantly higher than before the crisis began. As a result, the Bank of England expects inflation to tick above 10% for several months before falling again.
That means the Bank is likely to launch another sharp rise in interest rates next month, adding to the pressure on borrowers. Despite the prospects of a prolonged recession, Threadneedle Street argues it is duty bound to get inflation back down to its target rate of 2%.
This backdrop of high inflation and a weaker economic outlook will make for some difficult choices for Jeremy Hunt at Thursday’s autumn statement. After the latest figures, the chancellor was clear that getting inflation down was a key priority to stabilise the economy, alongside balancing the books after Liz Truss’s mini-budget.
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“This insidious tax is eating into pay cheques, household budgets and savings, while thwarting any chance of long-term economic growth,” he said. “We cannot have long-term, sustainable growth with high inflation.”
However, the big danger is that drastic action to cut government borrowing through tax rises and spending cuts could choke off the economy, while further ripping up the welfare state at a time when families need it most.
Hunt will be called on to take action to provide renewed support with a focus on supporting the most vulnerable, especially now that the government’s emergency energy price guarantee will expire in April, rather than the two years Truss had promised.
Without a replacement for the scheme, the Resolution Foundation thinktank estimates households’ annual bills could reach £4,000. That is a simply unsustainable sum for millions of people.