Breaking News
Investing Pro 0
NEW! Get Actionable Insights with InvestingPro+ Try 7 Days Free

U.K Inflation At A 4-Decade High Could Force BoE To Act More Aggressively

By The Tokenist (Shane Neagle)Market OverviewAug 18, 2022 08:02AM ET
www.investing.com/analysis/uk-inflation-at-a-4decade-high-could-force-boe-to-act-more-aggressively-200628691
U.K Inflation At A 4-Decade High Could Force BoE To Act More Aggressively
By The Tokenist (Shane Neagle)   |  Aug 18, 2022 08:02AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

Inflation in the U.K. rose to a new 4-decade high in July as fueled food and energy costs continued to weigh on consumers’ pockets, new data released on Wednesday showed.

The consumer price index (CPI), which serves as a measure of the overall changes in consumer prices, rose by 10.1% on an annual basis, above the consensus estimates and the June CPI print of 9.4%. Core inflation, which strips out volatile food and energy costs, rose to 6.2% annually last month, up from 5.8% in June and above the estimated 5.9%.

According to the Office for National Statistics (ONS), mounting food prices were the main factor driving the annual inflation between June and July.

PwC retail strategy director Kien Tan said:

“Supermarkets have had little choice but to pass on price increases from suppliers, themselves contending with unprecedented inflation in raw material and ingredient input costs.”

This is especially true for categories like dairy as some reports suggest that the price of a pint of milk has more than doubled in certain stores year-to-date, added Tan.

The ONS report also showed real wages in the country dropped by 3% annually in Q2 2022, marking its steepest-ever decline. While average pay excluding bonuses rose by 4.7% in the U.K., that increase is largely overshadowed by the mounting cost of living.

Dan Howe, head of investment trusts at Janus Henderson, said:

“Today’s inflation figures serve as a further reminder to many UK households that they are facing a period of considerable financial hardship.”

Six Consecutive Rate Hikes... And Still Not Enough

U.K. inflation hit a new 40-year high even after the country’s central bank made six straight interest rate hikes to curb spiraling consumer prices, with the latest hike earlier this month being the largest single increase in 27 years. The Bank of England (BoE) expects the U.K. to fall into the longest recession since the global financial crisis in the fourth quarter of this year.

BoE also said it expects inflation to peak at around 13.3% in October, before starting to come down towards the 2% target. The new CPI print also adds further pressure on Conservative Party members Liz Truss and Rish Sunak, one of whom is set to succeed the former prime minister Boris Johnson on September 5.

Both will have to address rising prices of food and energy with the new projections indicating that the U.K.’s energy price cap could hit £4,266 ($5,170) annually in early 2023 from the current £1,971 mark. Analysts expect that figure to surge beyond £3,000 in October after the next CPI print.

The country’s energy watchdog Ofgem recently raised the energy price cap by 54% to address mounting costs. The cap is expected to increase further in October when annual household energy bills are expected to surge beyond £3,600 ($4,396).

Meanwhile, the borrowing costs in the UK currently stand at 1.75% after the Monetary Policy Committee (MPC) voted for the first half-point increase since the Bank of England’s independence in 1997.

The MPC said in a statement:

“Inflationary pressures in the United Kingdom and the rest of Europe had intensified significantly since the May Monetary Policy Report and the MPC’s previous meeting. That largely reflected a near doubling in wholesale gas prices since May, owing to Russia’s restriction of gas supplies to Europe and the risk of further curbs.”

The MPC added it expects real wages to fall and CPI inflation to increase further in the near run. The labor market in the country also remains tight, with the unemployment rate reaching 3.8% in the second quarter and vacancies remaining at record-high levels. The committee expects underlying nominal wage growth to be greater than in the May period over the first half of the outlook period.

‘Difficult Job’ for BoE

Quilter Cheviot’s analyst Richard Carter expects the Bank of England to implement another 50-basis points interest rate hike at the next meeting to rein in inflationary pressures, adding the worst of the cost-of-living crisis is yet to come. He argues that “the Bank of England will continue to have a very difficult job on its hands.”

Andrew Bailey, Governor of the Bank of England, blamed the soaring inflation on the ongoing war in Ukraine. However, he said the war will not prevent the central bank from reaching its goal to bring inflation back to the 2% target.

Bailey noted that he is aware of the extent of the impact inflation will have on the cost of living in the U.K. He acknowledged that “inflation hits the least well-off hardest” but emphasized the importance of acting right away before the situation becomes even grimmer.

The central bank plans to start active government bond sales worth a total of £10 billion ($12.1 billion) as of September after receiving the final nod from the lawmakers.

Looking forward, the bank provided a gloomy outlook for the U.K.’s economic growth, saying that the latest surge in gas prices further affected the economy’s outlook in the U.K. and Europe.

Therefore, the MPC now expects the U.K. to fall into recession in the last quarter of the year and estimates it will last five quarters as real household post-tax income falls significantly in 2022 and 2023.

“Growth thereafter is very weak by historic standards. The contraction in output and weak growth outlook beyond that predominantly reflect the significant adverse impact of the sharp rises in global energy and tradable goods prices on U.K. household real incomes,” the MPC said in its monetary policy report.

These low projections underscore how dismal the U.K.’s economic outlook is compared to its global peers. At the same time, many UK stock trading apps are reporting a growing number of users, as the current UK inflationary environment isn’t detering new traders from entering the equities trading market.

Conclusion

The UK CPI data exceeded expectations again to set a new 4-decade high. Investors now have growing concerns that the latest set of CPI data will force the BoE to be even more aggressive in tightening.

More worryingly, the more aggressive the BoE is, the sharper recession is likely to be as a result. Hence, it is unlikely that the stock market will be able to sustain extremely aggressive central bank tightening coupled with a high risk of a sharp recession.

U.K Inflation At A 4-Decade High Could Force BoE To Act More Aggressively
 

Related Articles

Craig Erlam
Stubborn Inflation By Craig Erlam - Sep 29, 2022

Another miserable day for European equity markets as the prospect of recession becomes ever more real. US markets aren’t faring any better after the jobless claims data that showed...

U.K Inflation At A 4-Decade High Could Force BoE To Act More Aggressively

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email