UK consumer prices rose 10.1% year-on-year in September and continue to surge as the country grapples with rapidly rising food prices, high energy costs and political uncertainty.
Annual inflation has returned to its highest pace since 1982, matching the pace set in July. That’s up from 9.9% in August. Inflation was expected to peak at a slightly higher rate next month, but the reversal of government policy to keep household energy bills down has made the future trajectory of prices even more uncertain.
Prices were pushed up by large increases in food prices and, to a lesser extent, in restaurants and hotels. Food prices rose 14.5% year-on-year in his September, the biggest annual increase in more than 40 years, according to the National Bureau of Statistics. High energy costs continue to contribute to the fastest rising inflation in decades. But with price increases spread across goods and services, core inflation, which excludes food and energy prices, rose 6.5% year-on-year, up from 6.3% in August.
This is another sign of the tenacity of inflation facing politicians and policymakers around the world. This is encouraging central banks to head for a sharp rise in interest rates, sending a firm message that they will undo inflation and not allow rapid price increases to take hold in the economy.
However, the ever-changing fiscal policy is also complicating the situation as the government seeks to support households by raising the cost of living.
Just six weeks ago, UK Prime Minister Liz Truss pledged to freeze household energy bills, one of the biggest causes of rising inflation, for the next two winters from October. This week, much of Mr Truss’ economic agenda was undone by Britain’s new finance minister, who seeks to restore calm to markets that have lost faith in government finances. One of his victims was Mr. Truss’ breakthrough policy on utility bills. The Briton is now guaranteed a bill freeze until his April. The government then said it would come up with cheaper and more targeted plans to help people with their bills.
Economists at Pantheon Macroeconomics said in a research note this week that headline inflation could hit about 5% if households were forced to revert to paying caps set by market prices through the government’s energy regulator, Ofgem. pointed out that it would rise. But they said it was too early to predict what was most likely to happen as the government was still devising new plans to support bills from April onwards.
The Bank of England has been raising interest rates since December to combat inflation. The last two meetings raised the interest rate by half a percentage point, doubling its previous move, amid signs of rising inflationary pressures, especially in a labor market where wages have risen and many people are out of the workforce. I made it
The central bank is expected to keep raising rates for many more months, but analysts are wondering how and for how long the hikes will last as the UK economy slows. High inflation is weighing on household budgets, and expectations are mounting that the economy will contract next year as consumer spending declines.
The International Monetary Fund forecast that the UK economy will contract by 0.3% next year, after growing 3.6% this year.
Traders now expect the central bank to raise interest rates from 2.25% to more than 5% next year.