Inflation in the UK continues to outpace expectations. The repercussions are dire and likely to deter international investors.
- July’s CPI rose 10.1% year on year, defying expectations of a rise of 9.8%.
- The CPI rise was led as much by food prices as by rising energy costs.
- For the time being, wages have not been caught in the wave.
This month’s UK CPI figures serve up a grim reminder of the ripple effect of inflation. Higher prices are rolling through the economy as companies seek to pass on rising input costs to their customers. At the end of the chain sits the beleaguered consumer, facing vast rises in rental costs, energy bills and day-to-day living.
July’s heart-stopping CPI figure of 10.1% defied expectations of a rise of 9.8%. Economists now suggest that inflation may move even higher than the Bank of England’s current predictions of 13% when the energy price cap is lifted later this year. The horizon keeps moving a little more out of sight, with the inflationary peak ever more elusive.
The recent CPI rise was led as much by food prices as by rising energy costs. Food inflation reached 12.7%, the highest monthly growth in more than 20 years. Costs went up across almost all basic food products – not just bread and cereals, which were impacted by wheat shortages from the Ukraine crisis, but also milk, cheese and eggs. Inflation is moving in a wave across different sectors as companies are passing on rising input costs.
For the time being, wages have not been caught in the wave. This week’s jobs data showed growth in employees’ average total pay up 5.1%. This is high, but is a little slower than in the US, where wages and rents are rising even faster. The data also showed a slowdown in labour demand, with falling vacancy levels. This may not be good for households, but it may act to moderate wage inflation and stop the spread.
However, inflation pressures continue to build faster than economists can revise their figures. It is worth noting that while this is a global phenomenon, it is not being felt the same in every country. France, for example, is seeing inflation of just 6.1%. Their food prices are rising at around half the rate of the UK’s. Even Germany, with all its energy supply problems, is only experiencing inflation at 7.5%. The UK’s position is more difficult than most and the hit to its economy may be greater. This may steer international asset allocators away from the country once more.
Supporters of the UK will argue that its stock markets are cheap. Equally, its major companies derive most of their earnings from abroad and are largely untroubled by the weakness of the domestic economy. However, against the current backdrop, it is difficult to see what will draw investors back to UK assets.
