JERSEY Daily News

Highest value in 40 years – The inflation shock is dividing British society

Price increases in almost every category of goods and services pushed inflation in the UK to 9% in April, up from 7% in the previous month. A value of this magnitude was last recorded in March 1982. The Office for National Statistics (ONS) explained that almost three-quarters of the increase in prices was caused by the rise in energy prices.

As of April 1, the energy cost cap, set by the regulator as the cap on annual gas and electricity bills for households, had been raised by nearly £700 to £1,971. Added to this are higher prices for a large number of raw materials. More and more producers are passing the cost jumps on to consumers, said Grant Fitzner, chief economist at the ONS. “That drove prices for food, vehicles and metal products, machinery and equipment.”

Price increases, the likes of which have not been seen for decades, have been troubling all Western industrialized nations for months. The war in Ukraine, delivery problems due to lockdowns in China with high demand since the Covid pandemic, unusual drought in important agricultural regions are among the reasons. However, Great Britain occupies the top position among the G-7 countries with the current value.

Households are affected to varying degrees by the development. A study by the Institute for Fiscal Studies (IFS) shows that prices for the group with the poorest financial situation increased by 10.9 percent. “They spend a large part of their budget on energy and food,” said IFS chief Paul Johnson. For the wealthy, on the other hand, the price jump was 7.9 percent.

Observers expect further interest rate hikes to be one of the answers to the significant jump in prices, even though Andrew Bailey, Governor of the Bank of England, has just pointed out that the majority of the causes of inflation lie in international developments.

The British central bank has already raised interest rates four times in a row, they are currently at one percent. But in view of the disappointing economic development in recent months without growth, there are increasing doubts as to how courageously the central bankers can proceed.

“Persistently high inflation and the projected mild recession in late 2022 mean the Bank of England must continue to sail in treacherous waters, with the risk of potentially deepening a recession if interest rates rise too sharply,” said Urvish Patel, economist at the National Institute of Economic and Social Research.

Kitty Ussher, chief economist at the Institute of Directors, said the state of the UK economy and concerns about continued inflation are now the top concern for boards and managers. Companies would be reluctant to invest, which would entail additional problems for the national economy.

For weeks, business, welfare organizations and opposition parties have been demanding that the government do more to help financially disadvantaged households.

Finance Minister Rishi Sunak, on the other hand, repeatedly refers to the budget for the autumn, although it will be clear how the capping of energy prices will continue to develop. But it is important to quickly announce possible measures, according to Ussher, “in order to start limiting inflation expectations again.”

Less direct support from the UK government to households to cushion high energy costs is a key explanation for why inflation has been slower in the eurozone, commented Samuel Tombs, an economist at Pantheon Macroeconomics. On the continent, April inflation was unchanged from the previous month at 7.4 percent.

A clearer jump in services can be explained by the end of the reduction in VAT in the catering trade with the expiry of the Covid measures. But processed goods have also become more expensive in Great Britain than in the euro zone.

“It is difficult to avoid the conclusion that Brexit is partly responsible for the relative strength of commodity inflation. In the past, less expensive goods would have simply come to Britain across the Channel; the sharp difference in product price inflation suggests that is no longer happening.”

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