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UK inflation rate: Prices rise to 41-year highs as energy costs push households to brink

By Fitri Wulandari

Edited by Jekaterina Drozdovica


Updated

Magnifying glass focused on the word inflation on UK flag background. Hike interest rate. Inflation income crisis. Inflation, tax, cash flow and another financial concept in Britannia
UK inflation rate: Price rises return to 40-year highs as food costs push households to brink – Photo: lunopark / Shutterstock

Rishi Sunak, the UK’s new Prime Minister, faces the daunting task of dealing with a 41-year high inflation rate, a cost-of-living crisis and the depreciation of British pound (GBP) against the US dollar (GBP/USD). 

The difficulties were exacerbated by the 44-day tenure of the previous UK Prime Minister, Liz Truss. 

Her failed mini-budget, which focused on unfunded billions of pounds in tax cuts and spending increases, threw the UK economy into disarray, causing the pound to fall and the government’s bond yields to rise.

What will be the outlook for UK inflation rate under Mr Sunak?  

What is inflation and how is it measured in the UK?

Economists describe inflation as a gradual increase in the prices of goods and services. It also reflects the decline in the purchasing power of money. As a result, when prices rise, consumers can buy less with the same money. The loss of purchasing power has a significant impact on living costs, slowing economic growth.

The UK’s Office for National Statistics (ONS) calculates the Consumer Price Index (CPI) and the Consumer Price Index including housing costs (CPIH). 

The CPIH is the most comprehensive measure of inflation. It includes expenses involved with owning, maintaining and living in one’s home, also known as owner occupiers’ housing costs (OOH). 

OOH and Council Tax are significant expenses for many British households that are not factored into the CPI calculation.

ONS divides goods and services in CPIH basket into these 12 groups: 

  • Food and non-alcoholic beverages

  • Alcoholic beverages and tobacco

  • Clothing and footwear

  • Housing, water, electricity, gas and other fuels

  • Furniture, household equipment and maintenance

  • Health

  • Transport

  • Communication

  • Recreation and culture

  • Education

  • Restaurants and hotels

  • Miscellaneous goods and services

Housing, water, electricity, gas and other fuels have the biggest share in CPIH basket of about 29.4%.

Every middle of each month, price collectors track 100,000 prices for roughly 520 items of goods and services from 150 locations across the UK to calculate CPI and CPIH.

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UK inflation rate history

The inflation rate in England had been benign during the Covid-19 pandemic in 2020 until the first half of 2021. 

Over 2020, the pace of price increases was still below the UK central bank’s inflation target of 2%, with the lowest annual inflation rate at 0.2% in August 2020, according to the ONS’s UK inflation rate history data. Global commodity and energy prices plummeted as the pandemic’s travel restrictions and lockdowns crushed demand from fuel to food. 

Inflation started to climb, exceeding the target in May 2021 at an annual rate of 2.1% for both CPI and CPIH. By December 2021, the CPI had risen at an annual rate of 5.4% and CPIH at 4.8%, mainly due to rising energy prices, including electricity and gas prices. 

Rising inflation triggered the Bank of England (BoE) to start its tightening cycle, raising the policy rate to 0.25%, up from the low of 0.1%. It was the first rate increase since the pandemic. 

UK inflation rate, 2013 - 2022

Over 2022, the UK inflation rate continued to rise. Rebounding demand as the economy gradually recovered from the pandemic, combined with soaring commodity and energy prices caused by Russia’s invasion of Ukraine at the end of February 2022, have accelerated the pace of price rises.

The CPI inflation rate increased by double digits to 10.1% in July 2022, the highest in 40 years. It briefly fell to 9.9% in August before returning to a 40-year high of 10.1% in September and touching a 41-year high of 11.1% in October.

Energy costs biggest drive to inflation

Rising costs of housing and household services, mainly from electricity, gas and other fuels was the big driver that boosted UK inflation rate to the 41-year high, for both the CPIH and CPI readings in October.

Housing and household service costs increased by 11.7% in the 12 months to October 2022, up from 9.3% in September 2022, the ONS said. “The annual inflation rate was last higher in March 1991, when it stood at 12.5%.”

The increase followed the introduction of the government’s Energy Price Guarantee (EPG), which will limit the average household energy bill to maximum £2,500 per year. The scheme will be in place from 1 October 2022 to 31 March 2023.

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According to the ONS, the average unit price for gas under the EPG increased from 7.8 pence per kilowatt hour (p/kWh) to 10.3 p/kWh and for electricity from 27.2 p/kWh to 34.0 p/kWh. Even so, without the EPG, it was anticipated that the average price per kWh for gas and electricity would increase to 14.8 and 51.9, respectively.

In October 2022, UK households paid 88.9% more for electricity, gas, and other fuels than they did a year earlier.

In fact – famous last words – it looks like UK headline inflation is at its peak too, or there or thereabouts. The fact that the government is effectively fixing electricity/gas unit prices below wholesale costs until next April means this is probably as high as it will get, though admittedly we expect headline rates to stay in double-digits until at least February next year,” James Smith, developed market economist at ING Group wrote on 16 November.

The EPG was part of Truss’s failed budget plans announced on 8 September.  The energy bill support was thrown into uncertainty following Truss’s resignation in October. 

However, in the Autumn budget speech on 17 November, British Chancellor Jeremy Hunt announced the Energy Price Guarantee will be extended for another 12 months at an average £3,000 for a typical household starting April 2023, from £2,500 set in the original EPG plan.

While the new energy support package would protect average users from a £3,700 increase initially planned by the UK’s energy regulator, the Office of Gas and Electricity Markets (Ofgem), it would still be too expensive for low-income earners, according to Sarah Coles, senior personal finance analyst at Hargreaves Lansdown.

The rise would be an impossible challenge for those on lower incomes, so the additional support payments from the government are absolutely vital. However, even at this level there will still be enormous number of people facing impossible choices,” Coles wrote on 17 November.

Food inflation remains one of biggest contributors to UK inflation

Food and non-alcoholic beverages remained among the biggest contributors in driving the increase in the cost of living in the UK. It has continued to increase for the last 15 consecutive months, from minus 0.6% in July 2021, according to ONS.

In the 12 months to October 2022, prices of food and non-alcoholic beverages rose 16.4%, compared with 14.6% in September 2022. ONS estimated that the current inflation rate for this category was the highest since September 1977, when the food and non-alcoholic beverages annual inflation rate was 17.6%.

Surging transportation costs due to high crude oil prices combined with supply-chain bottlenecks and rising agricultural products due to the war in Ukraine had inflated the cost of imported food.

The UK imported around 46% of the food it consumed. European Union’s countries were the main source of food, feed and drink (FFD) imports, according to the government’s data.

GBP/USD strengthen on new budget plan

The British pound rose to 1.19 against the US on 23 November, from an all-time low of $1.03 on 26 September in response on Hunt’s economic plan. It’s also the highest in three months, according to Trading Economics. But it has fallen around 10% year-over-year (YoY)

Hunt’s proposed budget was a £55bn package of tax increases and spending cuts as Sunak’s administration sought to fix the chaos caused by Truss’s failed budget. Truss’s plan, which called for tax cuts to be financed by an increase in the public deficit, caused the pound to nosedive against the US dollar.

“Our baseline view sees GBP/USD dipping below 1.15 after the current bout of position adjustment has run its course, while we also favour some modest underperformance against the euro. EUR/GBP could be trading back to 0.89 by year-end,” ING analysts James Smith, Chris Turner and Antoine Bouvet wrote on 17 November.

GBP/USD exchange rate

UK inflation forecast: Targets for 2022 and beyond

As of 16 November, Dutch lender ING Group, in its UK inflation rate forecast for 2022, expected the UK inflation rate to peak at 10.2% in the fourth quarter of 2022, before moderating to 9.5% in the first quarter of 2023. Inflation was forecast to gradually fall to 3.1%, slightly above BoE’s upper inflation target of 3% in the final quarter of 2023.

Overall, ING forecast the inflation rate in the UK to average 8.9% in 2022, dropping to 5.9% in 2023. UK’s inflation rate was expected to fall to 2.1% in 2024 and drop to 1.9% in 2025.

ING’s Smith said the outlook for 2023 inflation would depend heavily on how the UK government adapted the energy support.

Scotia Bank’s UK inflation forecast on 17 October projected the UK’s CPI inflation rate to average 9% in 2022, falling to 6.7% in 2023 and 3.5% in 2024. 

ABN-Amro Bank maintained its forecast UK inflation rate for 2022 at 8.7% in its October forecast, from September estimates. The Amsterdam-based lender also cut its UK inflation predictions for 2023 to 6% from 6.6% in the previous forecast in September.

The British Chamber of Commerce’s UK inflation forecast saw CPI to peak at 14% in the fourth quarter of 2022. The UK expected inflation was set to ease to 5% in 2023 and return to the BoE’s target of 2% in 2024, BCC said in its economic forecast on 1 September.

Final thoughts on UK inflation rate 

Forecasts in this article suggested that the UK inflation rate could peak in the fourth quarter of 2022, cool in 2023 and return to the BoE’s target in 2024. 

Keep in mind that analysts’ predictions can be inaccurate. You shouldn’t use them to substitute your own research. Always perform your own due diligence before engaging in any trading activity. And never trade with funds that you cannot afford to lose.

FAQs

What is the UK inflation rate today?

The current UK inflation rate is 11.1% for October 2022.

Is inflation expected to rise in the UK?

Analysts mentioned in this article expected inflation to continue rising in the final quarter of 2022. The British Chamber of Commerce forecast inflation to peak to 14% in the fourth quarter of 2022. Inflation was predicted to ease but remain much higher than the BoE target in 2023 and 2024. Note that analysts’ forecasts can be wrong.

What is the predicted inflation rate for 2023?

As of 16 November, ING Group predicted the inflation rate in the UK to average 5.9% in 2023. ABN-Amro (27 October) and ScotiaBank (17 October) predicted the  UK inflation rate for 2023 at 6% and 6.7%. Note that their predictions can be wrong.

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