10 August: Falling Pump Prices Help Rate To Ease To 8.5%
Inflation in the United States slowed by more than expected last month, in a sign that the recent spike in prices might have passed its peak, writes Andrew Michael.
The technology-heavy Nasdaq index gained 2.5% on the news.
Today’s figures from the US Bureau of Labor Statistics show the consumer prices index rising by 8.5% in the year to July 2022, down from 9.1% – a 40-year high – a month earlier.
In a dip that exceeded forecasts, the Bureau said the weaker reading was driven by a fall in fuel prices, with its energy index falling by 4.6% month-on-month to July.
Consumer prices in the UK rose by 9.4% in the year to June 2022, with the Bank of England warning recently that the inflation figure could reach 13% by the end of the year. The Office for National Statistics will reveal the latest figures next week.
The latest numbers from the US will assuage concerns among investors that the country’s central bank, the Federal Reserve, will continue its policy of aggressive interest rate hikes at its next policy meeting in September.
Last month, the Fed raised its target benchmark interest rate by 0.75 percentage points, to a range between 2.25% and 2.5%, the second rate hike of this magnitude in successive months.
Rob Clarry, investment strategist at wealth manager Evelyn Partners, said: “The key question that markets have been grappling with over the last month is whether the Fed will deviate from its current tightening plans. Falling commodity prices, deteriorating consumer confidence, and slowing growth could tempt the Fed to take its foot off the gas in upcoming meetings.”
5 August: Recession To Hit UK By Last Quarter Of The Year
The UK is on the brink of recession the Bank of England has warned, as it raised interest rates by 0.5 percentage points yesterday. The hike in Bank rate from 1.25% to 1.75% marked the biggest increase for the past 27 years.
The Bank also forecast that the economy will begin to shrink in the last quarter of the year – between October and December – and continue contracting until the end of 2023.
It would mark the deepest recession since the ‘credit crunch’ of 2008.
A recession is universally defined by two consecutive quarters of negative growth in GDP or Gross Domestic Product – a measure of a country’s economic output. During a recession, the economy struggles, people lose their jobs, companies make fewer sales and the country’s overall economic output declines.
The Bank also revised its inflation forecasts to more than 13% by the end of the year – up from a current 9.4% – as even higher energy prices hit households from October when the regulator’s new price cap takes effect.
In the wake of another round of interest rate hikes – the sixth in seven months – the cost of mortgages will also rise further. Two million mortgaged homeowners will be immediately impacted, with millions more to follow when they come to remortgage or buy their first home.
However the Bank said that rate rises were necessary to tame soaring inflation, and to ‘do its job’ of bringing it back down to its 2% target.
It explained: “The main way we can bring inflation down is to increase interest rates. Higher interest rates make it more expensive for people to borrow money and encourage them to save.
“That means that, overall, they will tend to spend less. If people on the whole spend less on goods and services, prices will tend to rise more slowly. That lowers the rate of inflation.”
News of an imminent recession will come as a further blow to the swathes of households already struggling under mounting cost of living pressures.
Laith Khalaf, head of investment analysis at AJ Bell commented: “Winter is coming, and it’s shaping up to be an absolute horror show for the UK economy. Make no mistake, 0.5% is a historic interest rate rise, but it is overshadowed by the abysmal economic forecasts produced by the Bank of England.”
He added: “Inflation is now forecast to hit 13% at the back end of this year, when the UK is also expected to enter into recession, just in time for Christmas.”
However, Fraser Harker, Investment Analyst at 7IM, urged people to ‘look beyond the headlines’. He said: “The word recession means different things to different people. It’s perfectly possible that by the end of the year, the UK will have exhibited two consecutive quarters of falling GDP.
“However, this doesn’t necessarily have to be accompanied by the things that most people associate with a recession – such as widespread rises in unemployment and significant drops in house prices.”
4 August: Bank Rate Jumps By Half A Percentage Point As Bank Wages War On Inflation
The Bank of England (BoE) today raised its Bank rate from 1.25% to 1.75% – the highest level in 14 years – in a widely anticipated move aimed at heading off soaring UK inflation, writes Andrew Michael.
Latest data showed that UK inflation, as measured by the consumer prices index, had risen to a 40-year high of 9.4% in the year to June 2022.
But, explaining its decision behind today’s rate hike, the BoE warned that a recent surge in gas prices meant inflation could now rise above 13% by the end of the year – far higher than its May forecast.
The BoE also predicted that inflation could remain at “very elevated levels” throughout the course of next year.
The 50-basis point increase, announced by the BoE’s rate-setting Monetary Policy Committee (MPC), is the bank’s first rate-hike of this magnitude in 27 years and the first since the committee was created 25 years ago.
Members of the MPC voted overwhelmingly for the half-percentage point increase with eight votes in favour, compared with one against.
The increase to the Bank rate, the sixth announced by the BoE since December 2021, will have an almost immediate financial impact on around two million UK households on variable rate mortgages, including tracker deals.
For example, borrowers with a £200,000 mortgage currently priced at a variable rate of 3.5% can expect to see their monthly bill rise by around an extra £60.
The BoE’s announcement follows last week’s decision by the Federal Reserve, the US central bank, to raise its target benchmark interest rate by 0.75 percentage points to a range between 2.25% and 2.5%.
Inflation in the US currently stands at 9.1%. Both the BoE and the Fed each have inflation targets of 2%.
Alice Haine, personal finance analyst at investing service Bestinvest, said: “While it is unusual for a central bank to raise rates when the economy is in danger of falling into a recession, the country is in the grip of a cost-of-living crisis as global challenges such as Ukraine’s war with Russia drive up food and fuel prices to dizzying highs.”
Haine added: “The latest interest rate rise will also eat into the Government’s package of handouts to support struggling households. Up to eight million vulnerable households are in line to receive £1,200 in Government aid this year to help them cope with the huge financial hit delivered by the cost-of-living crisis, including the £326 support payment issued last month.”
Les Cameron, financial expert at M&G Wealth, said: “Staring down the barrel of potential double-digit inflation means reviewing your finances and ensuring your savings can weather future challenges is now more important than ever.”
The result of the BoE’s next rate-setting meeting will be announced on 15 September 2022.
27 July: Federal Reserve Hikes Rate In Battle Against Inflation
The United States Federal Reserve today raised its target benchmark interest rate by 0.75 percentage points to a range between 2.25% to 2.5%.
It implemented a same-sized increase in June from a base of 1% (see story below).
The scale and pace of the increases is seen by economists as an indication of the growing sense of urgency at the US central bank as it battles inflation standing at 9.1%, the highest it has been since the beginning of the 1980s.
The three main US market indices all responded positively to the move. The Dow Jones Industrial Index rose by over 530 points to 32,291 while the S&P 500 rose by almost 3% to 4,037. The NASDAQ index of tech stocks increased by over 4% to top 12,000.
In the UK, the main Bank interest rate stands at 1.25% – it was increased from 1% in June – while inflation is running at 9.4%. The Bank of England is widely expected to increase the Bank rate to 1.75% when the next rate announcement is made on 4 August.
21 July: Eurozone Hikes Interest Rates For First Time Since 2011
The European Central Bank (ECB) today announced an increase in interest rates for the first time in over a decade in a larger-than-expected move designed to fight inflation across the Eurozone. The rise will take effect from 27 July.
The ECB’s governing council said the base rate across the 19-member currency bloc will rise by 0.5%, from minus 0.5% to zero. The 50-basis point hike, double the amount mooted last month, is the largest imposed by the central bank since 2000.
It also hinted at further interest rate rises at future meetings, although it gave no guidance on the size of those increases.
Today’s move brings Eurozone monetary policy more into line with that of both the Bank of England and the US Federal Reserve, which have each raised interest rates multiple times this year.
A rate set at zero means that neither borrowers nor institutions benefit from money being held on deposit.
Critics accused the ECB of being asleep at the wheel after inflation soared to 8.6% across the Eurozone – more than four times the central bank’s target of 2%.
The latest inflation surge has largely been driven by the economic impact of the war in Ukraine coupled with soaring energy prices.
Today’s announcement from the ECB came in the wake of the earlier resignation of Italian Prime Minister, Mario Draghi, terminating a national unity government that had been created to tackle unpopular reforms in the country.
Garry White, chief investment commentator at wealth manager Charles Stanley, said: “The ECB hawks are sounding tough right now, but they may have to temper their talk and guidance to face up to the realities of weak government finances in the periphery, and the fact a slowdown is already underway.
“To top it off, the ECB will now also be worried about political problems in Italy. For voting members of the ECB, inflation is not their only preoccupation, unlike the other western central banks.”
20 July: Pressure Ramps Up On Bank Of England To Tackle Rising Prices
UK inflation rose to a 40-year high of 9.4% in the year to June 2022, according to the latest figures from the Office for National Statistics (ONS).
The increase was slightly ahead of the 9.3% predicted by economists. On a monthly basis, the Consumer Prices Index (CPI) increased by 0.8% in June 2022, compared with a rise of 0.5% in June 2021.
The news will heap added pressure on household finances already stretched to breaking point as consumers grapple with the worst cost-of-living crisis in years.
The ONS said rising prices for fuel and food were the main contributors to the latest CPI figure edging higher, outweighing downward forces coming from the second-hand car market and audio-visual equipment.
Grant Fitzner, ONS chief economist, said: “Annual inflation again rose to stand at its highest rate for over 40 years. The increase was driven by rising fuel and food prices.
“The cost of both raw materials and goods leaving factories continued to rise, driven higher by higher metal and food prices respectively.”
In recent months the UK, along with many countries around the world, has felt the brunt of inflationary economic headwinds thanks to surging energy prices, a squeeze in the post-pandemic global supply chain, and the ongoing war in Ukraine.
UK inflation now teeters at nearly five times the 2% target set for the Bank of England (BoE) by the government. The BoE has forecast that inflation will peak at around 11% later this year before levels start to fall during 2023.
Addressing the City of London’s annual Mansion House dinner yesterday, Andrew Bailey, the BoE governor, raised the possibility of increasing interest rates by half a percentage point in early August as he toughened the central bank’s language on tackling rising prices.
The BoE has already raised the bank rate five times, to its present level of 1.25%, since December 2021. A half-percentage point increase would be the largest hike in the bank rate since 1995.
Richard Carter, head of fixed interest research at Quilter Cheviot, said: “Another month and another rise in inflation as the relentless pressure on consumers continues. This time the UK consumer prices index came in at 9.4%, a touch higher than forecasted as continued high energy and petrol prices take effect.
“The Bank of England will be feeling the heat of the past few days and has a very difficult job on its hands to ensure the economy has a soft landing. Recession fears are growing by the day and if more extreme interest rate rises are required, this could easily tip the economy into contraction.”
Matt Roche, Associate Investment Director at Killik & Co, said: “With inflation expected to reach 11% by autumn, the purchasing power of savings in bank accounts is being rapidly eroded. In this environment, savers should look at investing as a means of inflation proofing their money.
“While it is advisable to keep a cash buffer for emergencies and plan major outlays well in advance, surplus monies can be made to work harder. For example, a stocks & shares individual savings account can provide excellent tax efficient long-term returns. With share prices having generally fallen in 2022, global stock markets now look that much more appealing for lifetime savers.”
14 July: Pressure Mounts On Federal Reserve To Tackle Rising Prices
US inflation accelerated to a new 40-year high in the year to June 2022, according to the latest figures from the US Bureau of Labor Statistics (BLS), writes Andrew Michael.
In a jump that outpaced even the most aggressive forecasts, the BLS reported on Wednesday (13 July) that consumer prices rose to 9.1% last month, putting the annual inflation rate at its highest level since November 1981. Inflation in the UK also stands at 9.1%.
The BLS said prices rose across most goods and services leaving Americans having to dig deeper to pay for fuel, food, healthcare and rent.
Strong inflationary headwinds are now a regular feature of the global economic environment.
Consumer prices are feeling the effect of soaring energy prices and the conflict in Ukraine, as well as suffering from a global supply chain problem as the world emerges from the Covid-19 pandemic.
The latest inflation figure from the BLS has put the Federal Reserve, the US central bank, under pressure to abandon its monetary policy guidance for the second month in a row and raise interest rates by a full percentage point at the end of this month.
In June, the Fed increased its interest rates ceiling from 1% to 1.75%. The last time a 0.75% percentage point hike had been imposed prior to this was in 1994.
The Fed, in line with other central banks around the world such as the Bank of England in the UK, has an inflation target of 2%.
Richard Carter, head of fixed interest research at Quilter Cheviot, said: “US consumer prices have breached 9%, hitting 9.1% in the year to June. We now have to question just how close we are to the peak.
“A 0.75% hike from the Federal Reserve at its next meeting is an absolute certainty and there may even be pressure from some quarters for it to do more. Central banks are clearly struggling to get a handle on inflation and if this number continues to grow or hover around this level, then more will be required to drive it down, regardless of the economic consequences this may have.”
 In a surprise move, the Bank of Canada raised its key interest rate on Wednesday (13 July) by one percentage point to 2.5% in a bid to head off inflation that policymakers warned was at risk at becoming entrenched.
6 July: National Insurance Contributions Threshold Uplift Lands Today
Millions of pay packets will receive a boost from Wednesday 6 July when the threshold at which National Insurance contributions (NICs) become payable rises from £9,880 to £12,570, writes Andrew Michael.
The change was announced in the Spring Statement in March.
NICs increased as planned at the start of this financial year on 6 April to help fund the government’s Covid response, but the scheduled move attracted criticism in the early months of this year, with critics slamming it as another cost burden on households facing a worsening cost-of-living crisis.
This prompted Rishi Sunak MP, Chancellor of the Exchequer at the time, to engineer the upcoming threshold increase.
NICs, a tax on earnings and self-employed profits, are the UK government’s second-largest source of tax revenue after income tax. Payment of NICs is important because it provides individuals with the right to receive certain social security benefits, including the state pension.
The 6 July change means people categorised by HM Revenue & Customs for tax purposes as Class 1 (employed) or Class 4 (self-employed) are able to earn an extra £2,690 before paying anything to NI.
Interactive Investor (ii), the investment platform, estimates that the uplift in the NI threshold will benefit 30 million people, saving a typical worker around £330 a year. The move also means that around 2.2 million people will be lifted out of paying NI entirely.
However, ii pointed out that the effect of fiscal drag means that UK taxpayers are set to pay as much as £16,000 more in tax on their income by the end of 2026, when a series of tax-free allowances and thresholds are set to be lifted.
Fiscal drag arises when inflation or earning growth pushes taxpayers into a higher rate tax bracket.
Last year, the Chancellor froze the basic and higher rate income tax thresholds from 2022 to 2026. At a time of increasing average wages, the move will suck an increasing number of people into the higher rate tax bracket.
According to ii, by 2026 a basic rate taxpayer earning £30,000 will see their take home pay reduced by £1,816 in real terms due to the personal tax allowance and the NI threshold not keeping pace with inflation.
The company added that higher rate taxpayers would experience an even bigger impact on their earnings. It calculated that someone earning £50,000 will have £4,271 less in their pocket in real terms by 2026, while a top earner with an income of £150,000 will pay an extra £15,596 in tax.
II’s calculation took into account the recent 1.25 percentage points increase to NI imposed by the Treasury to support the NHS, as well as the increase to the NI starting threshold.
Alice Guy, personal finance expert at ii, says: “The Chancellor is carrying out a secret £3,631 tax raid on millions of struggling families. It will push many families to the brink as they cope with a crushing tax burden on top of the existing cost-of-living crisis.”
22 June: UK Inflation Hits 9.1% As Food Prices Soar
UK inflation edged up to 9.1% in the year to May 2022 – its highest level since 1982 – according to the latest figures from the Office for National Statistics (ONS).
The news will add extra pressure to already stretched household finances, as consumers grapple with the worst cost-of-living crisis in years.
On a monthly basis, the Consumer Prices Index (CPI) increased by 0.7% in May this year, compared with a rise of 0.6% in May 2021.
The ONS said that rising prices for both food and non-alcoholic drinks – compared with falls for both a year ago – were the main contributors to the latest CPI figure edging higher.
In recent months the UK, along with many countries around the world, has felt the brunt of inflationary economic headwinds thanks to surging energy prices, a global post-pandemic supply chain bottleneck, and the ongoing conflict in Ukraine.
UK inflation is now nearly five times the 2% target set for the Bank of England (BoE) by the government. Last week, the BoE raised the Bank Rate to 1.25% in its latest bid to tackle the inflation figure.
At the same time, the UK’s central bank warned that inflation could reach 11% later this year. Energy costs are set to soar in October in line with an anticipated rise in the energy price cap, announced by Ofgem, the energy regulator.
Grant Fitzner, ONS chief economist, said: “The price of goods leaving factories rose at their fastest rate in 45 years driven by widespread food price rises, while the cost of raw materials leapt at their fastest rate on record.”
Alice Haine, personal finance analyst at Bestinvest, said: “People’s spending power is now severely hampered and households need to do some serious financial stock-taking if they want to continue to afford the level of lifestyle they have become accustomed to.”
Haine added: “With prices heading ever higher, slashing budgets now to reduce spending is vital for those that want to ride out the year with their bank balance still in the black, as runaway inflation means your salary simply does not stretch as far.”
Paul Craig, portfolio manager at Quilter Investors, said: “While the rate of growth in the inflation rate may have slowed, we have plenty warnings that this is not the peak. Disappointingly, the cost-of-living crisis is not going to be a short-lived affair, and this ultimately leaves the BoE stuck between a rock and a hard place.”
“While the US has acknowledged the need to go hard and fast on interest rates, the BoE continues to plod along at a slower pace, trying not to tip the economy into recession at a time when businesses and consumers are feeling the pinch.”
“However, their current strategy is doing little to stop inflation running away from it and thus harder decisions are coming very soon with the Bank already hinting at a larger rise at its next meeting.”
16 June: Interest Rate Hits 1.25% As Bank Wages War On Inflation
The Bank of England (BoE) today raised its Bank rate from 1% to 1.25%, in an attempt to stave off runaway UK inflation.
Latest data showed that consumer prices jumped by 9% in the year to April 2022, the highest level amongst the G7 group of leading world economies.
Today’s 0.25 percentage point hike was widely predicted by City forecasters. The last time the Bank Rate exceeded 1% was in 2009 when Gordon Brown was Prime Minister and the world economy was emerging from the global financial crisis.
The increase is the BoE’s fifth rate rise since December last year and followed yesterday’s decision by the US Federal Reserve to raise its interest rates ceiling by 75 basis points to 1.75% (see story below).
According to the BoE, its rate-setting Monetary Policy Committee votedby six to three in favour of a rate rise.
Today’s announcement is the latest in a series of attempts by central banks around the world to tackle the inflationary headwinds being felt in many countries. US inflation stands at 8.6%. Both the BoE and the Fed have inflation targets of 2%.
A rise in the UK bank rate can prove costly to households – already reeling from a squeeze in the cost-of-living – that have either variable rate or tracker mortgages. This is because lenders tend to increase the repayments required on home loans to reflect higher borrowing costs.
In contrast, UK savers will benefit from the rate hike if they have money deposited in variable-rate paying accounts, assuming providers decide to pass on either all, or part, of a rate rise to customers.
The new Bank Rate announcement is on 4 August, when another rise is on the cards, perhaps of the same magnitude, although a rise of 50 basis points to 1.75% cannot be ruled out.
15 June: Federal Reserve Raises US Interest Rates, Bank Of England Announcement Imminent
The United States Federal Reserve has increased its interest rates ceiling from 1% to 1.75% today in a bid to tackle the country’s highest inflation rate in 40 years.
The 0.75 percentage point hike in the Fed’s benchmark rate had been widely anticipated by commentators in recent days. The Fed last imposed a rate increase of this magnitude in 1994.
US inflation currently stands at 8.6%. Today’s rate hike is a sign from the Fed of an increasingly aggressive stance towards monetary tightening in a bid to tackling soaring consumer prices.
The latest increase follows a half-percentage point hike in interest rates announced last month.
The Fed said: “Inflation remains elevated, reflecting supply and demand imbalances relating to the pandemic, higher energy prices and broader price pressures.
“The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The invasion and related events are creating additional upward pressure on inflation and are weighing on global economic activity.”
Central banks in multiple bids to control inflation
Today’s announcement by the Fed is the latest in a series of attempts by the world’s central banks to tackle inflationary headwinds being felt in many countries.
Global inflationary pressures are being exacerbated by multiple factors including soaring energy prices, post-pandemic worldwide supply chain bottlenecks, and the war in Ukraine.
Both the Fed and the Bank of England (BoE), the UK’s central bank equivalent, have inflation targets of 2%. The UK inflation rate currently stands at 9%.
Tomorrow (Thursday), the BoE is widely being tipped to announce a 0.25 percentage point increase to the UK bank rate. The rate currently stands at 1% following four rate hikes since December last year.
Should the BoE’s Monetary Policy Committee decide to increase rates, the move will prove costly to households with variable rate and tracker mortgages as lenders tend to increase repayments to reflect their own higher borrowing costs.
Savers, in contrast, would benefit from any further hikes if they have money deposited in variable rate-paying accounts, assuming their provider decided to pass on any rise to its customers.
In the UK, steepling inflation is partly responsible for a cost-of-living crisis that has squeezed the incomes for households that have been left poorer following a raft of tax increases that came into effect in April 2022.
Laith Khalaf, head of investment analysis at online broker AJ Bell, said: “The global economy might be slowing, but central banks across the developed world are facing an existential question of credibility. If they fail to act in the face of such rampant inflation, they undermine their very raison d’être, but by hiking rates aggressively, they put pressure on economic activity.”
13 June: Worries Mount Over Rising Living Costs
More than three-quarters of UK adults feel either ‘very’ or ‘somewhat’ worried about the rising costs of living, according to the results of a May survey carried out by the Bank of England and Ipsos which explores attitudes to inflation.
Groups most likely to feel ‘very or somewhat worried’ include women, people aged between 30 to 49 years, disabled people, and those living with a dependent child aged 0 to 4 years.
While levels of worry generally transcended income brackets, those earning less than £10,000 a year accounted for the largest proportion of being ‘very worried’ (31%), compared to only 12% of those with annual salaries of £50,000 or more.
Half of all adults (50%) who reported they were ‘very worried’ about the rising cost of living, thought about it on a daily basis, according to the survey.
Sarah Coles, senior personal finance analyst, Hargreaves Lansdown, said: “It’s difficult enough to cover our costs right now, but what makes matters worse, is that prices are going to keep rising from here. Inflation is expected to remain higher for the rest of the year, and peak at the end of 2022. It means that even those who are coping now may well start struggling later.
The report coincided with US inflation figures which revealed that consumer prices climbed to 8.6% in the year to May, according to the US Bureau of Labor Statistics (BLS), marking a new 40-year high.
The UK’s consumer price index (CPI) measure of inflation currently stands at 9% in the year to April, with May’s figures to be announced on 22 June.
Separate figures released today by the Office For National Statistics, showed that the UK’s economy as measured by its GDP (Gross Domestic Product) shrank in April by 0.3%, due to services, production and construction sectors all retracting. It marks the second consecutive month that the economy has shrunk, having retracted by 0.1% in March, and is fuelling fears of a recession.
The relentlessly-increasing cost of living is applying further pressure on the Bank of England to increase interest rates when the next decision is announced this Thursday (16 June), further impacting the cost of mortgages.
10 June: US Inflation Soars To 40-Year High
US inflation hit a new 40-year high in the year to May 2022, according to the latest figures from the US Bureau of Labor Statistics (BLS).
The BLS reported that consumer prices rose to 8.6% last month, an increase of 0.3 percentage points on the 8.3% reported in the year to April 2022, putting them at their highest level since December 1981. The bureau said that the main contributors to the latest inflation figure included ‘shelter’ (housing), food and fuel.
Strong inflationary headwinds have become a mainstay of the global economic environment over the past nine months. Consumer prices are not only feeling the effect of soaring energy prices and the ongoing conflict in Ukraine, but are also suffering from a global supply chain problem as the world emerges from the effects of the Covid-19 pandemic.
The US figure, which exceeded market expectations of 8.3%, will make uneasy reading for the US Federal Reserve which meets next week to decide its next move on interest rates. The Fed, in line with other central banks around the world such as the Bank of England in the UK, has an inflation target of 2%.
In May, the Fed raised its headline funds rate by half of a percentage point to 1%, its first 50-basis point hike in more than 20 years. Today’s inflation figure may prompt a further rate rise of a similar magnitude next week.
The Fed has already committed to imposing monetary policy “expeditiously” to a more “neutral” level that no longer stimulates the economy. But additional evidence that inflation is becoming more entrenched could force officials to hike rates even more forcefully than financial markets expect.
Dan Boardman-Weston, ceo of BRI Wealth Management, said: “The Fed has a tricky task ahead of it trying to ensure that inflation expectations don’t become entrenched, but they are likely to continue tightening policy into a slowing economy. The ‘softish’ landing they are hoping for continues to look like a big ask.”
10 June: Eurozone Faces First Interest Rate Rise Since 2011
The European Central Bank (ECB) says it will raise interest rates this summer, the first increase of its kind for 11 years, after warning that inflation would increase by more than previously estimated.
The ECB’s governing council announced that the base rate for the 19-member currency bloc would be raised by 0.25% in July, with the potential for a further – and possibly larger – hike already pencilled in for September.
July’s increase will lift the main deposit rate for commercial banks up from its current level of -0.5%. A negative interest rate effectively means that borrowers are paying institutions for the privilege of having their money sitting on deposit.
Critics have accused the ECB of being asleep at the wheel after inflation soared to 8.1% across the Eurozone – more than four times the central bank’s 2% target.
The latest inflation surge has largely been driven by sparing energy prices, coupled with the economic impact from the war in Ukraine.
The ECB’s announcement will bring Eurozone monetary policy more into line with the Bank of England and the US Federal Reserve which have raised interest rates multiple times this year.
Christine Lagarde, the ECB president, said that: “It is good practice to start with an incremental increase that is not… excessive.”
Ms Lagarde added there was a risk that food and energy price inflation will stay high for some time, and also that businesses’ capacity could take a permanent hit which also had the potential to damage Eurozone economies for a prolonged period.
Assuming the ECB’s rate hike goes ahead, the central banks of Japan and Switzerland would be the last two major monetary authorities worldwide that were still applying negative rates.
Hinesh Patel, portfolio manager at Quilter Investors, said: “The ECB has previously been well behind the curve when it comes to tightening policy, and to some extent it is holding fast still, though this finally looks to be coming to an end.
“For now, the balancing act faced by the ECB continues to be a tricky one. The bloc is faced with inflationary shock that requires quick and decisive action, yet Russia’s ongoing attack on Ukraine continues to cast a shadow of uncertainty over Europe that could end with weak demand and recession.”
30 May 2022: Cheapest Groceries Inflation Matching General Prices Rises
Research by the Office for National Statistics (ONS) has found the average price of a basket of low-cost food items has risen at a lower rate than the official Consumer Prices Index (CPI) – but broadly in line with more general food and drink costs.
The ONS found the cost of budget grocery items rose between 6% and 7% in the 12 months to April. This compares to an inflation rate of 6.7% for more general ‘food and non-alcoholic beverages’ that were tracked over the same period.
While both measures are less than the headline annual rate of inflation (9% to April), it found stark price differences between individual budget food products.
For example, the cost of pasta has risen by 50% since April 2021, while the average price of potatoes has actually fallen by 14%. Rice, beef, bread and crisps are up by 15% – 17% while cheese, sausages, pizza and chips were down by up to 7%.
The ONS also took into account ‘shrinkflation’ — the process of reducing product sizes while retaining their previous price.
The ONS compiled prices for 30 everyday food and non-alcoholic drink items — including pasta, potatoes, vegetable oil, chicken and fruit squash — comparing prices between seven UK supermarket websites to report the cheapest available version of each product.
This experimental research aims to establish how the cheapest everyday consumer goods are being impacted by inflation in the UK, since the official consumer price index is influenced by more expensive purchases such as clothing and footwear, entertainment, and restaurants.
Fears of a global wheat shortage are likely to trigger further price increases for staples such as pasta and bread.
The Russian invasion of Ukraine, which produced a quarter of the world’s wheat exports prior to the conflict, has disrupted export routes via the Black Sea.
18 May: Inflation Rockets To 9%
- Consumer Prices Index (CPI) measure of inflation rose by 9.0% in the 12 months to April 2022, up from 7.0% in March
- CPI rose by 2.5% in April 2022, compared with a rise of 0.6% in April 2021
UK inflation rocketed to 9% in April 2022 – up from 7% the previous month – taking the figure to its highest level in 40 years, as consumer prices felt the effect of soaring energy costs and impact of the ongoing conflict in Ukraine.
The latest increase, announced by the Office for National Statistics (ONS), will exacerbate the cost-of-living crisis facing millions of UK households as prices gnaw away at the buying power of people’s incomes.
Today’s inflation increase arrives as many workers are seeing their wages fall sharply in real terms. Average salaries, excluding bonuses, rose 4.2% in the three months to March 2022, according to ONS data – an increase that was largely gobbled up by the surging cost of living.
Recent figures from the National Institute of Economic and Social Research (NIESR) predict a worsening situation with real disposable income dropping 2.4% this year. This would cause an extra 250,000 households to fall into destitution by 2023, taking total UK numbers falling into the category of extreme poverty to 1 million.
‘Destitution’ is defined as where a family of four has £140 a week or less to live on after housing costs.
NIESR has also warned that rising prices and higher taxes are squeezing household budgets across the economic divide. It estimates that an additional 1.5 million households across the UK are facing food and energy bills greater than their disposable income.
The latest inflation surge is being driven by soaring energy and fuel prices, coupled with the economic impact from the war in Ukraine.
These are factors outside the control of the Bank of England (BoE), which sets interest rates, meaning stretched consumers have little option but to cut back outgoings so they can live within their means.
Alice Haine, personal finance analyst at Bestinvest, said: “Taking constructive action to reduce spending now is imperative as the outlook darkens from here.
“Slashing household budgets is the best strategy, but it can only go so far if people have already trimmed out all the luxuries such as eating out, holidays and clothes shopping.
“Once households find themselves struggling to pay for the essentials, such as mortgages or rents, food and household bills, they run the risk of building up debt on overdrafts and credit cards they cannot afford to repay.”
The effect of inflation on your finances depends on your individual spending habits. Your personal financial situation may be impacted more – or less – than the headline rate of 9%.
This is because the ONS – which records consumer prices data – calculates its figures from a virtual basket of 700 items made up of everyday items such as milk and bread, to bigger ticket items such as air travel costs or the price of a new car.
Impact on savers
Savers with cash sitting in deposit accounts should take a little comfort from the BoE’s recent spate of four interest rate rises in the past six months. The latest quarter-point hike took the Bank rate to 1%, its highest level since 2009.
In tandem with these moves, savings rates have edged up slowly with easy-access accounts now paying 1% or above and the top, fixed-rate products around or above the 2% mark.
Banks and building societies, however, are traditionally glacially slow at passing on the good news from upwards rate rises to savers. What’s more, even with interest rates on the rise, their effect is eclipsed by the current sky-high inflation level – all of which delivers a negative real rate of return on savings.
The best advice for savers in this situation is to shop around for the best rates to ensure their cash is working for them as hard as it possibly can.
Sarah Coles of Hargreaves Lansdown said: “For the four in five savers who have left their money languishing in easy access accounts with the high street banks – paying 0.1% or less – now is the time to move.
“The high street giants have passed on an insultingly small fraction of the rate rise to savers, so there’s no point holding on just in case they suddenly decide to do the decent thing”.
Coles adds that if you have savings you won’t need for five years or longer, it’s worth considering whether any extra money could be working harder for you in investments: “These will rise and fall in value over the short term, but over 5-10 years or more they stand a much better chance of beating inflation than cash savings,” she points out.
What comes next?
Unlike the US, which recently witnessed a small reversal in its inflation figure (see story below), UK inflation continues to rise for the time being, stoking further fears around cost-of-living issues heading through 2022 and into next year.
The Bank of England has suggested inflation could peak at 10% later this year when the energy price cap is increased in October.
Richard Carter, head of fixed interest research at Quilter Cheviot says: “This will add to the pressure on the BoE to increase interest rates and get to grips with soaring prices even if, as they admit themselves, many of the factors driving inflation are beyond their control.
“We should not be surprised to see further pressure mount on the government soon to pull some fiscal levers and look to alleviate the pain on households this autumn.”
Another option would be for the government to impose a one-off levy on oil and gas producing companies, which have seen their profits soar thanks to runaway price of gas in the past year.
Earlier this week, Rishi Sunak, the Chancellor of the Exchequer, stepped up warnings to the oil and gas industry that, unless companies soon announced increased investment plans for the UK, they could face a potential windfall tax on their profits.
Impact on incomes
Debbie Kennedy at broker LifeSearch says the majority of Brits are worried about their finances: “Our research found that seven in 10 (72%) of all Brits expect to be worse-off financially this year as inflation soars, anticipating to be £3,020 per year out-of-pocket on average.
“Overall, just 8% of respondents said they don’t think they’ll be worse off financially as a result of inflation.
“The rising cost of living is having a detrimental effect on our mental health too. Three-quarters (74%) of adults say their mental health has been negatively impacted in the last two years and of these, the ‘rising cost of living’ (28%), closely followed by ‘Covid restrictions’ (27%), were the top causes.”
11 May: US Inflation Stays Elevated At Near 40-Year High
US inflation showed a slight deceleration in April, though prices continued to grow close to a 40-year high, according to the latest figures from the US Bureau of Labor Statistics (BLS).
The BLS reported that consumer prices dipped slightly to 8.3% in April, still stubbornly high, but down from the previous month’s figure of 8.5%. Economists had predicted a bigger easing in the inflation rate to 8.1%.
Data showed that prices rose by an extra 0.3% in April, slower than the 1.2% recorded in March. The BLS says the main contributors to the latest inflation figure include shelter, food, airline fares and new vehicles.
Commentators suggest the latest inflation figure will keep up the pressure on the US Federal Reserve, the country’s central bank, to carry on with a programme of half-percentage point interest rate rises through the course of 2022.
The Fed recently increased its interest rates ceiling from 0.5% to 1% and did not rule out similar moves during the remainder of this year.
In recent weeks, other central banks including the Bank of England, Reserve Bank of India and Reserve Bank of Australia have each increased interest rates in a bid to tackle the inflationary headwinds being felt in many countries worldwide.
The drop in US CPI may be welcomed by markets with investors starting to hope that peak inflation has now passed.
However, the numbers were still worse than expected and commentators believe it is too early to celebrate with inflation likely to remain high for some time to come, exacerbated by an ongoing crisis in the energy market and the continued conflict in Ukraine.
Richard Carter, head of fixed interest research at Quilter Cheviot, said: “The pressure is still very much on the Fed to raise interest rates and get inflation under control. Nevertheless, attention is now beginning to turn to a sharp slowdown that is predicted for the global economy, and markets are increasingly becoming concerned by this.”
Dan Boardman-Weston, CEO of BRI Wealth Management, said: “The Fed has a tricky task ahead of it trying to ensure that inflation expectations don’t become entrenched. They are likely to continue tightening policy into a slowing economy. The ‘softish’ landing it is hoping for may not be so soft.”
The next announcement on UK inflation rates is due from the Office for National Statistics on 18 May.
5 May: Bank of England Hikes Interest Rate To 1%
The Bank of England (BoE) today raised its Bank rate of interest from 0.75% to 1%, in a bid to counter the UK’s soaring inflation rate.
UK inflation stands at 7%, and the 25-basis point hike was widely predicted by City forecasters. UK interest rates last stood at 1% in the early part of 2009.
The move, the BoE’s fourth rate rise since December last year, followed yesterday’s decision by the US Federal Reserve to raise its interest rates ceiling by 50 basis points to 1%.
Today’s announcement by the BoE is the latest in a series of attempts by central banks around the world to tackle the inflationary headwinds being felt in many countries. US inflation stands at 8.5%. Both the BoE and the Fed have inflation targets of 2%.
Earlier this week, the Reserve Bank of India and Reserve Bank of Australia both announced interest rate hikes. The first rise in a decade in the case of the latter.
A rise in the UK bank rate can prove costly to households with either variable rate or tracker mortgages. This is because lenders tend to increase the repayments required on home loans to reflect higher borrowing costs.
In contrast, UK savers will benefit from the rate hike if they have money deposited in variable-rate paying accounts, assuming providers decide to pass on either all, or part, of a rate rise to customers.
Laura Suter, head of personal finance at AJ Bell, said: “Today’s move by BoE rate setters lumps even more pain on households struggling with the cost of living crisis. The global nature of the drivers of inflation means that this increase to 1% is very unlikely to beat inflation into a hasty retreat, but what it is certain to do is pile more misery on people already having to rely on debt just to pay their bills.”
The next Bank rate announcement will be on 16 June.
4 May: US Raises Interest Rates, Bank Of England Decision Imminent
The United States Federal Reserve has increased its interest rates ceiling from 0.5% to 1% today in a bid to counter the country’s highest inflation rate in 40 years.
Inflation in the US currently stands at 8.5%, and the 50 basis point hike in the Fed’s benchmark rate – the largest change to its main policy rate since 2000 – was widely anticipated by commentators. The increase follows on from a quarter point hike in interest rates announced by the Fed in March.
As part of its two-day policy meeting that concluded today, the Federal Open Market Committee voted to raise the target range of the federal funds rate to between 0.75% and 1%.
In a statement, the Fed said that it expected “ongoing increases in the target range will be appropriate”, paving the way for possible additional half-percentage point rises later this year.
Richard Carter, head of fixed interest research at Quilter Cheviot, said: “This 50 basis point hike by the Federal Reserve is likely to be followed by several more, judging by the tone of the statement and the fact that the US economy continues to fire on all cylinders.
“Inflation is running at over 8%, while the latest employment report showed that there are almost two jobs available for every unemployed worker. These pressures won’t be going away anytime soon, and thus the Fed feels the need to act severely and fast.”
Central banks in multiple bids to control inflation
Today’s announcement by the Fed is the latest in a series of attempts by central banks around the world to tackle inflationary headwinds being felt in many countries.
Earlier today, the Reserve Bank of India announced a 40 basis points rise in its benchmark interest rate to 4.4%. On Tuesday this week, the Reserve Bank of Australia surprised economists by hiking its official rate by 25 basis points to 0.35%. The upwards move was the first of its kind in the country for a decade.
Global inflationary pressures are being exacerbated by the war in Ukraine. Inflation has also been driven by factors including soaring energy prices, as well as the reawakening of slumbering global economies post-pandemic.
Both the Fed and the Bank of England, the UK’s central bank equivalent, have inflation targets of 2%. The UK inflation rate currently stands at 7%.
Tomorrow (Thursday), the Bank is widely expected to announce an increase to the UK bank rate. This currently stands at 0.75% having already been subject to three rate rises since December last year.
If confirmed, a rise in the UK bank rate could prove costly to households with variable rate and tracker mortgages as lenders tend to increase repayments to reflect higher borrowing costs.
Savers, in contrast, would benefit from a hike if they have money deposited in variable-rate paying accounts where a provider decided to pass on any rate rise to its customers, in full or in part.
In the UK, steepling inflation is partly responsible for a cost-of-living crisis that has squeezed the incomes for households that have been left poorer following a raft of tax increases that came into effect in April.
20 April: UK Car Production Plummets By 100k In First Quarter
The number of cars produced in the UK in the first quarter of 2022 fell by 99,211 year on year, from 306,558 to 207,347 – a drop of almost a third. The 2021 figure was already comparatively low due to the impact of the pandemic and associated lockdowns.
The Society of Motor Manufacturers & Traders (SMMT) attributes the current decline to a shortage of components – particularly semiconductors – and problems with the global supply chain. It also cited the high price of electricity as a pain-point for car-makers.
Output in March fell by more than a third, down by -33.4% year-on-year, with 76,900 units made compared with 115,498 in the same month last year. This decline resulted in the weakest March since the financial crisis in 2009, when 62,000 cars were built.
The SMMT is calling for the government to grant the car industry relief on energy costs in the same way as it is given to energy-intensive industries such as steel production. It also wants UK firms to be given access to low cost and low carbon energy on the same footing as its European competitors.
Mike Hawes, SMMT chief executive, said: “Two years after the start of the pandemic, automotive production is still suffering badly. Recovery has not yet begun and, with a backdrop of an increasingly difficult economic environment, including escalating energy costs, urgent action is needed to protect the competitiveness of UK manufacturing.
“We want the UK to be at the forefront of the transition to electrified vehicles, not just as a market but as a manufacturer so action is urgently needed if we are to safeguard jobs and livelihoods.”
James Hind, CEO of car trading site carwow, said: “Demand for new cars is still strong and, in many cases, consumers are prepared to wait. We aren’t seeing the drop in consumer confidence impacting new car demand yet.
“However, many of those that aren’t prepared to wait are switching their interest to electric vehicles, which are less impacted by production issues – plus car manufacturers are prioritising EV production, meaning there are plenty of options to choose from.
“The other knock-on effect of course is to the second-hand car market. As motorists struggle to get hold of new models, many are turning to the second-hand car market, and as a results, demand is rising and so are prices.
“Anyone looking to switch their car might want to do it now. They could get a great price for their second hand petrol or diesel car – and potentially get an affordable, new EV much quicker than a new petrol or diesel vehicle.”
13 April: UK Inflation Rockets To 30-Year High
Inflation leapt to a new 30-year high in the year to March 2022, according to the latest figures from the Office for National Statistics (ONS).
Forced higher by surging fuel costs as a result of the conflict in Ukraine, the Consumer Price Index (CPI) rose at an annual rate of 7% in the 12 months to March, up from 6.2% in February.
The latest inflation figure sharply exceeded City expectations and came a day after consumer price inflation in the US surged to a 40-year high of 8.5% in the year to March 2022.
Rising prices put an extra squeeze on household finances already gripped in a cost-of-living crisis. Commentators warn UK inflation could rise further beyond 8% before starting to level off by the end of the year.
UK inflation in March was more than three times the 2% target set for the Bank of England (BoE) by the government. It was also substantially higher than the rate of “around 6%” that the BoE forecast at the time of its last bank rate-setting meeting in March.
The bank rate currently stands at 0.75%. Today’s inflation figure will add extra pressure on the BoE’s Monetary Policy Committee to raise interest rates once again on 5 May. The BoE has already raised the rate three times since December 2021.
Grant Fitzner, ONS chief economist, said: “Broad-based prices saw annual inflation increase sharply again in March. Among the largest increases were petrol costs, with prices mostly collected before the recent (5p per litre) cut in fuel duty, and furniture.
“Restaurant and hotel prices also rose steeply in March while, after falling a year ago, there were rises across a number of different types of food.”
Paul Craig, portfolio manager at Quilter Investors, said: “Last month’s Spring Statement did little to quell the fears of those already feeling the squeeze financially, and the introduction of the new energy price cap and the national insurance increase has further increased the pressure.
“With wages failing to keep up and pensions not rising by a similar amount, things are going to get tough for a lot of consumers.”
Martin Beck, chief economic advisor to the EY ITEM Club, said: “There will be another significant increase in inflation in the April data, when we expect the CPI rate to rise to at least 8.5%. This will be caused by the 54% rise in the energy price cap and the VAT rate for the hospitality sector being restored to 20%.
“That should represent the peak. But with the war in Ukraine potentially helping to keep food and oil prices elevated for a prolonged period, and another rise in the energy price cap on the cards for October, inflation will be slow to fall back. Over 2022 as a whole, we expect CPI inflation to average close to 7%.”
12 April: US Inflation Soars To 40-Year High
US consumer price growth surged by 8.5% in the year to March 2022, surpassing Wall Street’s expectations and propelling the country’s inflation rate to its highest figure in more than 40 years.
Today’s increase in the consumer price index, as reported by the US Bureau of Labor Statistics, was caused by rising costs for energy, food and accommodation as the impact of Russia’s invasion of Ukraine began to take effect.
Last month Joe Biden, the US President, banned all imports of oil and gas from Russia following the conflict in Ukraine, which started at the end of February.
Commentators suggested the latest figure will only pile extra pressure on the US Federal Reserve to accelerate the pace of the interest rate increases it announces in a bid to tame inflation.
Last month, the Fed raised interest rates from 0.25% to 0.5% – their first increase in four years. Along with other central banks, such as the Bank of England, the Fed has an inflation target of 2%. The next Fed rate-setting meeting is on 3-4 May.
UK inflation, as measured by consumer prices, currently stands at 6.2%, while the BoE bank rate is 0.75%. The BoE’s rate-setting Monetary Policy Committee is next due to meet at the beginning of May, with its decision released on 5 May.
Countries worldwide are facing severe inflationary headwinds at the current time. Retail inflation in India last month rose to a 17-month high of 6.95% from 6.07% in February 2022. Consumer prices in Turkey in the year to March 2022 hit 61%, a rise of seven percentage points on the previous month.
Hinesh Patel, portfolio manager at Quilter Investors, said: “The Fed will feel emboldened today to press ahead with its aggressive hiking of interest rates as it looks to combat inflation. While used car prices and other non-essential items have begun to reach their price peak, the headline figures today illustrate how much of this is an energy-related shock.”
Dan Boardman-Weston, CEO & CIO at BRI Wealth Management, said: “The Fed has a tricky task ahead of it and historically has struggled to battle inflation without lowering economic growth.”
29 March: Poorer Households “Facing 10% Inflation”
Typical household energy bills could rise to nearly £2,500 by autumn this year, according to an influential forecasting group.
The EY Item Club (EYIC) says the rise in energy and commodity prices in part caused by the Ukraine conflict will have a severe effect on households and drag back UK economic activity.
It says rising prices will add to UK inflation already at “significant” levels, predicting inflation will peak at a 40-year high of 8.5% next month and forecasting that prices will still be growing by 6% at the end of 2022.
EYIC is also warning that, while households across the economic spectrum have experienced similar levels of inflation of late, the 54% rise in typical home energy bills this April means lower-income households could experience an inflation rate of around 10%.
With further energy bill increases expected in October, EYIC says lower-income households are likely to experience persistently higher levels of inflation relative to their higher-income counterparts, well into 2023.
Martin Beck, chief economic adviser to the EYIC, said that, while the recent Spring Statement contained some help for households, a consumer squeeze is on the way: “Consumer spending is a key part of the UK economy, and the expectation has been that the passing of the worst of the pandemic would spur a corresponding consumer recovery. But the war in Ukraine and rising energy prices mean that outlook has dimmed.”
23 March: Inflation To Hit 8.7% Later This Year – OBR
- UK inflation forecast to peak at 8.7% this autumn
- Inflation to remain above 7% until 2023
- Household incomes predicted to fall by largest-ever amount
The Office for Budget Responsibility (OBR), the government’s fiscal watchdog, has predicted that UK inflation will peak at 8.7% later this year as rising prices are further exacerbated by the ongoing Russian invasion of Ukraine.
UK inflation as measured by the Consumer Price Index (CPI) jumped to a 30-year high of 6.2% in the year to February 2022. In recent months, rising inflation has been driven by soaring global prices for energy, petrol, food and durable goods.
In its report published alongside today’s Spring Statement, the OBR said it expected CPI inflation to peak at 8.7% in the fourth quarter of 2022. It also forecasted that UK inflation would remain above 7% in each quarter from the second quarter of 2022, until the first of quarter of 2023.
The OBR said it also expected rising inflation to be above earnings growth over the next year. It added that, despite the policy measures announced by Rishi Sunak, Chancellor of the Exchequer, in the Spring Statement, there would be a net increase in taxes across the economy starting from next month.
As a result, the OBR predicted that household post-tax incomes adjusted for inflation would fall during the tax year 2022/23 by 2.2%, their largest-ever drop since records began in the 1950s.
23 March: Inflation Hits 30-Year High Ahead Of Spring Statement
UK inflation soared to a new 30-year year high in the year to February 2022, according to the latest figures from the Office for National Statistics (ONS).
The figures will add pressure on Chancellor Rishi Sunak to announce extra financial support for households already facing a severe cost-of-living crisis when he delivers his Spring Statement at lunchtime.
The consumer price index (CPI) rose at an annual rate of 6.2% in the 12 months to February, up from 5.5% the previous month, its highest level since 1992. The figure overshot forecasts which had predicted a rise of 5.9%.
CPI increased by 0.8% in February 2022, the largest monthly rise between January and February since 2009.
In recent months, steepling inflation has been driven by soaring global prices for energy, petrol, food and durable goods. The ONS says the largest contributors to the latest increase in the monthly rate came from transport, household goods and furniture, while the cost of food and non-alcoholic drinks was also higher.
Today’s figures do not account for further price rises caused by the war in Ukraine, which started at the end of February.
Grant Fitzner, ONS chief economist, said: “Inflation rose steeply in February as prices increased for a wide range of goods and services, for products as diverse as food to toys and games. Furniture and flooring also contributed to the rise in inflation as prices started to recover following new year sales.”
Paul Craig, portfolio manager at Quilter Investors, said: “All eyes will be on the Chancellor today as he presents his Spring Statement and announces measures the government will take to tackle the ongoing cost-of-living crisis.
“This morning’s inflation data shows just how dire the situation is, and there is a clear need for the government to act to help save many from slipping into financial difficulty as their wages are quickly swallowed up.”
Dan Boardman-Weston, CIO at BRI Wealth Management, said: “The data continues to point towards another few months of rises in the rate of inflation, but we expect this to ease as we head into the summer.”
The Bank of England, which raised interest rates to 0.75% last week, has forecast that inflation will hit 8% in the spring, with further rises later in the year pushing it towards 10% and possibly beyond.
17 March: Bank of England Hikes Interest Rate To 0.75% In Bid To Tackle Inflation
The Bank of England has raised the Bank rate of interest to 0.75%, an increase of 0.25 percentage points. The move follows a similar increase by the Federal Reserve in the United States yesterday, which saw rates there increase from 0.25% to 0.5% (see story below).
Central banks are increasing rates in a bid to remove inflationary pressures triggered by rising energy, fuel and food prices. The latest UK inflation rate, announced last month, is 5.5%, but this is expected to rise steeply when the impacts of the conflict in Ukraine are factored into the calculation.
Prior to the conflict, the Bank of England said inflation would rise above 7% this spring. Some forecasters are saying a rate above 8% is possible, largely due to a 54% increase in domestic energy bills, but the most pessimistic have forecast rates above 10%.
The most recent inflation figure for the US is 7.9% – a 40-year high. Again, this is expected to rise further in the coming months.
The Bank of England has now increased the Bank rate three times since December 2021, and more rises may be forthcoming.
This will be bad news for those with variable rate and tracker mortgages, whose repayments likely increase to reflect the higher cost of borrowing. Homeowners with fixed rate deals will likely have to pay more when their term comes to an end and they need to find another loan.
The news will be more positive for savers if institutions pass on the increase in rates.
The next Bank of England Rate announcement is due on 5 May.
16 March: US Raises Interest Rates, Bank of England Mulls Next Move
The United States Federal Reserve has increased interest rates from 0.25% to 0.5% today in a bid to counter 40-year high inflation rates. This is the first increase in US interest rates since 2018.
The country’s consumer price index rose by 7.9% in February, although the figure did not take account of the latest inflationary pressures flowing from the conflict in Ukraine and economic sanctions imposed on Russia (see story below).
The Fed has an inflation target of 2%. The interest rate rise is intended to cool the economy by reducing the availability of ‘cheap’ money. Further rate hikes may be made in the coming months – in the Fed’s words: “… ongoing increases in the target range will be appropriate.”
The Bank of England will announce its latest decision on the UK Bank rate tomorrow (Thursday). The rate has increased twice since December and now stands at 0.5%.
The UK rate of inflation stands at 5.5% (the Bank’s target is also 2%). Economists are expecting a rise of 0.25 percentage points to take the rate to 0.75%, which would feed through to mortgage rates – although many lenders have ‘priced in’ a rate rise in their current offers.
Existing borrowers on variable rate and tracker deals would see their cost of borrowing increase in the next couple of months. Those on fixed rates would likely be faced with more expensive loans when their current deal comes to an end.
There has been some speculation that the Bank rate could double to 1% given the mounting inflationary pressures in the economy. The Bank of England has already conceded that inflation will top 7% this spring, but again the prediction was made ahead of the Ukraine crisis. Some commentators have suggested inflation could hit double figures in the next few months.
14 March: ONS Overhauls Inflation Price Basket
The Office for National Statistics (ONS), which measures the rate of inflation in the UK, has announced changes to the basket of items it uses to track how prices are moving.
The ONS tracks around 730 prices for goods and services for its consumer price indices. It updates its basket annually “to avoid potential biases that might otherwise develop, for example, because of the development of entirely new goods and services. These procedures also help to ensure that the indices reflect longer-term trends in consumer spending patterns.”
The latest updates sees the inclusion of a range of new items, with others being dropped because of changing patterns of consumer behavior. Many of the changes can be seen to reflect the impact of the pandemic and the associated lockdowns.
New items include meat-free sausages, sports bras and crop tops, anti-bacterial surface wipes, craft and hobby kits for adults and pet collars.
Items dropped from the list include men’s suits, coal, doughnuts and hard-copy reference books.
Reasons for change
Not all the changes can be traced directly to the pandemic. For example, meat-free sausages have been added to expand the range of “free from” products in the basket, reflecting the growth in vegetarianism and veganism.
However, antibacterial surface wipes have been added to the list of cleaning products to represent current cleaning trends together with the demand for antibacterial products in response to COVID-19.
Similarly, pet collars have been introduced because of increased consumer spending on pet accessories linked to the rise in pet ownership more generally since the start of the pandemic.
Changes are also made to the basket in response to wider changes in society. For example, the sale of domestic coal will be banned in 2023 as part of the government’s actions to combat climate change.
The ONS says dropping it from the basket in 2022 protects the index from the possibility of being unable to collect price information towards the end of the year and from abnormal price movements, which could be seen as the deadline approaches for the ban to come into effect.
It says that, in some cases, items are dropped to reflect decreasing expenditure, such as doughnuts: “Research and anecdotal evidence from retailers has indicated that sales have fallen, potentially because of the rise in homeworking.
“Most individual cakes, which is what ‘doughnuts’ represents, are sold in multipacks, and a separate multipack cake item remains in the basket.”
10 March: US Inflation Hits 40-year High
The US consumer price index surged by 7.9% in the year to February 2022, propelling the country’s inflation rate to its highest figure since January 1982.
The increase, reported today by the US Bureau of Labor Statistics, was driven higher by rising costs for gas, food and housing, but did not factor in most of the energy price rises brought about following Russia’s invasion of Ukraine on 24 February.
Before the latest inflation news, the US Federal Reserve was already under considerable pressure to tame inflation by raising interest rates when it meets next week.
In addition to imposing sanctions on Russia’s central bank and excluding the country from the global financial system, the US administration, led by President Joe Biden, has banned imports of Russian oil and gas.
Last month, faced with the same inflationary headwinds affecting all major economies, the Bank of England (BoE) increased the Bank rate from 0.25% to 0.5%. This was the second increase in the space of three months, following a rise from 0.1% to 0.25% in December 2021.
The BoE’s Monetary Policy Committee also meets next week to decide if further monetary tightening is required as UK households continue to grapple with a cost-of-living crisis caused by soaring inflation exacerbated by the relentless surge in energy prices.
Any rise in the UK bank rate would inevitably be reflected in increased interest rates for borrowers, particularly those with mortgages.
Richard Carter, head of fixed interest research at investment firm Quilter Cheviot, said: “Any hopes that inflation may have been starting to reach its peak in the US have been well and truly dashed. Given this data captures the period before Russia’s invasion of Ukraine, inflation won’t be stopping there. A rate hike at the Fed’s meeting next week looks like a certainty.”
Caleb Thibodeau at Validus Risk Management said: “It will take a formidable change in circumstances to steer the Fed away from a hike next Wednesday and at all subsequent Federal Open Market Committee meetings this year.”
16 February: Inflation Hits 30-Year High With Worse To Come This Spring
UK inflation, as measured by the Consumer Price Index (CPI), rose to a 30-year high in the year to January 2022, according to the latest figures from the Office for National Statistics (ONS).
Consumer prices increased at an annual rate of 5.5% in January 2022, up from 5.4% the previous month and well above the figure of 0.7% recorded in January last year. Prices last accelerated this quickly in March 1992.
Inflation is now over three percentage points higher than the 2% target set for the Bank of England (BoE) by the government. The BoE forecasted recently that UK inflation will exceed 7% this spring before starting to fall back after that.
The ONS said clothing, footwear, the rising costs of household goods and rent increases helped push up prices last month. But it added that this January’s rise was partially offset by lower prices at the petrol pumps, following record highs at the end of last year.
Fuel prices have since peaked once more, hitting £1.48 per litre for petrol and £1.51 per litre for diesel. Along with the hike in the domestic energy cap by 54% in April, this is the reason for the Bank’s gloomy short-term forecast.
Grant Fitzner, chief economist at ONS, said last month witnessed traditional price drops in some sectors but that “it was the smallest January fall since 1990, with fewer sales than last year.”
The latest ONS announcement is likely to pile more pressure on the BoE to take an aggressive stance on interest rates. The BoE has already announced two rate rises in the space of the last three months. The Bank rate currently stands at 0.5%.
Jason Hollands of investing platform Bestinvest said: “Further and material increases in inflation are almost certainly coming, in part due to the lifting of the cap on energy bills. So, the thumb screws are going to continue to tighten over the coming months, with the Bank forecasting inflation will hit 7% by Easter.”
Rupert Thompson at wealth manager Kingswood said: “Inflation will head higher still over coming months, likely peaking at around 7.5% in April when the increase in the energy price cap feeds through. Today’s data leave a further 0.25% rate hike in March looking all but a done deal.”
Last month, four of the nine members of the Bank’s Monetary Policy Committee, which decides interest rates, voted for an increase in the Bank rate of half a per cent to 0.75%. If this hawkish sentiment prevails at the next meeting in March, the rate could double to 1%.
19 January: Consumer Prices Index Highest In 30 Years
UK inflation, as measured by the Consumer Prices Index, jumped to 5.4% in the 12 months to December 2021 – its highest level in 30 years – according to the latest figures from the Office for National Statistics (ONS).
The CPI figure last reached this level in March 1992.
In line with recent economic announcements around the world UK inflation has spiked in recent months – November’s CPI figure came in at 5.1% – leaving UK households facing the threat of a deepening cost-of-living crisis. The US recently revealed a figure of 7.5%.
December’s figure is well over three percentage points higher than the Bank of England (BoE) 2% target, set by the government.
The latest inflation data could prompt a second, rapid rise in interest rates following on from the Bank of England’s decision before Christmas to hike the bank rate to 0.25% from its all-time low of 0.1%.
According to the ONS, a range of factors are responsible for the latest inflation increase. These include rising prices for food, restaurant bills, hotel costs, furniture, household goods, clothing and footwear in the run-up to Christmas.
But Grant Fitzner, ONS chief economist, said there was little evidence that pandemic-imposed restrictions had contributed to rising prices: “The closures in the economy last year have impacted some items but, overall, this effect on the headline rate of inflation was negligible.”
Interest rates decision
Paul Craig, portfolio manager at Quilter Investors, said: “The Bank of England was vindicated in its decision to hike rates in December in the face of Omicron uncertainty, but it could still go either way when its Monetary Policy Committee [MPC] meets in early February.
“The MPC will be faced with a difficult trade-off between ensuring financial stability or helping households cope with a cost-of-living crisis that is set to squeeze household finances over a difficult winter period.”
What to expect this April
In addition to an increase in National Insurance Contributions in April and a sustained freezing of personal tax allowances, which will push many earners into higher tax brackets, households are facing the prospect of huge energy bill increases due to a rise in the official price cap.
Analysts suggest prices could increase by up to 50% when the cap is adjusted in April. The scale of the increase will be announced in early February.
Last autumn, having temporarily suspended calculations based on the so-called ‘triple lock’, the government confirmed it would be increasing a range of state benefits from April 2022 based on September 2021’s CPI figure of 3.1%.
For 2022-23, the full State Pension will increase from its present rate of £179.60 a week to £185.20 a week (£9,630 a year).
Working-age benefits, benefits to help with additional needs arising from disability, and carers’ benefits will all rise by the same rate of 3.1% from April as well.
Other payments due to rise include Universal Credit, Personal Independence Payments, Child Benefit, Jobseeker’s Allowance, Income Support and Pension Credit.
15 December: UK Inflation Reaches Highest Level In Over 10 Years
Inflation, as measured by the Consumer Price Index (CPI), rose by 5.1% in the 12 months to November 2021 – its highest level in over a decade – according to the latest figures from the Office for National Statistics (ONS).
The inflation figure has been on a sharp upward trajectory in the latter part of 2021 – October’s figure came in at 4.2% – and is now at its highest level since September 2011.
The latest figure was well above City forecasts of 4.7% and now stands at more than double the Bank of England’s 2% target, set by the government. The steep rise from October to November could contribute to a potential hike in interest rates when the UK’s central bank reveals its final decision of the year on the subject later this week.
Grant Fritzner, ONS chief economist, said: “A wide range of price rises contributed to another steep rise in inflation.”
He added that the price of fuel had increased notably, “pushing average petrol prices higher than we’ve seen before”. Other contributors included increased clothing costs, along with price rises for food, second-hand cars and increased tobacco duty.
According to Canada Life, the change in inflation leaves the UK’s near-40 million households collectively needing to find an extra £39.6 billion a year to maintain their standard of living compared with 12 months ago.
Andrew Tulley, technical director at Canada Life, said: “The latest inflation numbers give us little hope for any financial festive cheer. We are all feeling the pinch and the reality is the average UK household will need to find over a thousand pounds extra next year to maintain current living standards.”
The UK figures follow recent inflation data from the US which showed that consumer prices in November had increased at their fastest pace in nearly 40 years.
Last week, the US Bureau of Labor Statistics reported that its consumer price index had risen by 6.8% in the year to November. The last time the figure had increased so rapidly was in 1982.
6 Dec: Bank Of England: Inflation Could ‘Comfortably Exceed’ 5% in 2022
The Bank of England has warned that inflation could ‘comfortably exceed 5%’ in the next few months, when energy regulator Ofgem puts up its energy price cap in April 2022, raising the cost of energy bills for millions of UK households.
The cap is based on trailing average prices in wholesale energy markets – with the relevant period for the next adjustment in April falling between August 2021 and February 2022.
Speaking to the Leeds Business School, the Bank’s deputy governor of monetary policy, Ben Broadbent, said: “Two-thirds of the way through we can already be reasonably certain (unfortunately) of a further significant rise in retail energy prices next spring.”
Ofgem’s current price cap, which took effect on 1 October, is set at a record £1,277 a year or £1,309 for a prepayment meter tariff cap. The cap applies to households on a standard variable tariff (SVTs) consuming an average amount of energy. It refers to unit price of energy meaning that – depending on how much energy is used – some households will pay less or more.
Inflation is already running high, with annual growth recording 4.2% for October, as measured by the Consumer Prices Index (CPI). This was up from 3.1% in September and is more than double the 2% target set by the Government.
The next inflation announcement is on 15 December.
Mr Broadbent told Leeds Business School: “I’m coming here at an extraordinary time for the economy in general and for monetary policy in particular.”
17 Nov: Inflation Near 10-Year High, Prompts Rate Hike Expectations
Inflation – as measured by the Consumer Price Index (CPI) – rose by 4.2% in the 12 months to October 2021, according to figures out today from the Office for National Statistics. This follows a 3.1% rise recorded in September,
Today’s figure is the highest 12-month inflation rate since November 2011, when the CPI annual inflation rate was 4.8%.
The figure is more than double the Bank of England’s 2% target, set by the government. This is stoking expectations the Bank will hike its key interest rate in December in a bid to cool the economy – a move that would likely trigger an increase in mortgage rates.
The current rate of 0.1% was widely tipped to increase earlier this month, but the Bank decided to hold fire at its meeting on 4 November.
The steep climb in the cost of living is blamed on the increase in the domestic energy price cap on 1 October, rising forecourt pump prices and inflationary pressures across the economy as companies struggle with increases in the cost of raw materials.
Prices in hotels and restaurants have also increased relative to last year because hospitality firms no longer benefit from a reduction in their VAT bills.
Economists warn that any increase in the Bank Rate will not affect the trajectory of inflation for several months. Dan Boardman-Weston at BRI Wealth Management, said: “Inflation is going to keep getting worse over the coming months as supply stays stretched, demand stays robust and base effects technically push the rate of inflation higher.
“This is undoubtedly going to put pressure on the Bank of England to raise rates, which we suspect they will have to do in the next few months given the high levels of inflation and robust labour market.”
Supply and demand
Inflation in the United States topped 6% in October. As with the UK, the hope is that the reasons for prices rising so sharply are “transitory”, but global supply chain issues married to increasing demand as economies emerge from the Covid-19 crisis is resulting in increasingly gloomy forecasts in some quarters.
However, Mr Boardman-Weston cautions against any knee-jerk reaction: “Nothing we see leads us to believe that this inflation is permanent and as we start heading into Spring next year the figures will start falling rapidly.
“The Bank needs to be careful they’re not too hasty in tightening monetary policy as a policy misstep could do more harm to the economy than this transitory inflation we are witnessing.”
While mortgage customers will view the latest inflation figures with concern, savers may see a glimmer of hope that they may earn a better rate on their accounts – although any improvement would need to be set into the context of rising prices.
The Bank will announce its latest Bank Rate decision on 16 December.
20 October: Inflation Dips To 3.1% In September, Sets Level Of 2022 Pension Rise
UK inflation bucked a recent upwards trend and dipped slightly last month, according to the latest official figures from the Office of National Statistics (ONS).
The Consumer Prices Index (CPI) measure rose by 3.1% in September 2021, slipping back from 3.2% in August.
The ONS said increased prices for transport were the main contributor to an overall rise in prices, along with household goods, food and furniture.
It added that restaurants and hotels helped pull the inflation rate lower. This was because prices rose less this summer compared with the same time last year, when the government’s Eat Out To Help Out scheme was running.
Despite a month-on-month fall in the inflation rate, the level remains well above the Bank of England (BoE) target of 2%.
September’s inflation figure is unlikely to have an impact on the BoE’s imminent decision on interest rates, due at the beginning of November, as a pause in the rate moving upwards had been anticipated.
Commentators believe September’s dip in inflation was a blip, with further rises anticipated in the coming months. This is because the latest numbers have yet to take into account either the recent surge in energy prices or the petrol pump crisis of a few weeks ago.
Laith Khalaf, head of investment analysis at brokers AJ Bell warned that: “Inflation will still get worse before it gets better. Inflation is being broadly felt, seeing as the biggest drivers are housing and transport costs, which are unavoidable for almost everyone in the country.”
September’s inflation figure of 3.1% will be used to determine next year’s rise in the state pension.
This means that, from April 2022, a pensioner who receives the new full state pension can expect a rise from £179.60 a week to £185.15. For those on the basic state pension, the current figure of £137.60 will rise to £141.86 next spring.
Next year’s increase could potentially have been as high as 8%, had the government decided not to scrap its so-called ‘triple lock’ for one year, on the back of an artificially distorted picture of UK wage growth following the pandemic.
The triple lock aims to increase the state pension in line with the highest of three measures: 2.5%, CPI inflation and earnings. Earlier this year, the government said it would suspend the use of the latter after earnings data spiked as people returned to work following the termination of its furlough programme.
15 September: Inflation Hits 3.2% With Further Rises In Energy Pipeline
The UK inflation rate jumped sharply last month, according to the latest figures from the Office of National Statistics (ONS).
The Consumer Prices Index (CPI) rose by 3.2% in August, up from 2% a month earlier. The 1.2 percentage point rise is the largest recorded by the CPI National Statistic 12-month inflation rate series, which began in 1997.
Inflation in the UK topped 10% in 1990 and was over 26% in 1975.
The latest figures mean inflation is now at its highest rate since March 2012 on the back of higher prices for transport, restaurants and hotels.
Last summer, prices for food and drink were discounted because of the government’s temporary Eat Out to Help Out response to the pandemic.
Used car prices also contributed to the rise. Demand is high because of a reduction in the supply of new models, which itself is attributed to a shortage of the computer chips used in their manufacture.
Rising energy prices are expected to fuel further increases in the rate of inflation over the coming months.
What’s Happening In The UK Energy Market?
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The latest CPI figure far exceeds the 2% official target set by the Bank of England (BoE).
Jonathan Athow, deputy national statistician at the ONS, said: “August saw the largest rise in annual inflation month-on-month since the series was introduced almost a quarter of a century ago.
“Much of this is likely to be temporary, as last year, restaurant and café prices fell substantially due to the Eat Out to Help Out scheme, while this year, prices rose.”
August’s inflation rate rise coincides with a recent spike in prices across wholesale energy markets, a combination that could have serious financial implications for millions of the UK’s energy customers this winter.
Last month, Ofgem, the UK’s energy regulator, announced it is raising its cap on standard variable rate default tariffs by 12% to £1,277, its highest-ever level. The new cap takes effect from 1 October, when the prepayment tariffs cap will rise by £153 to £1,309.
Around 15 million households will be hit by the cap increases. Ofgem recommends that those on default rates should switch their energy tariff to find a cheaper alternative. Prepay customers may also be able to save by switching.
Next month’s data, covering September’s inflation figures, will determine the level at which the state pension will be uprated from April 2022 under the new, temporary ‘double lock’ recently introduced by the government.
*At least 50% of savers who switched via our partner of choice energyhelpline in the period between 1st Jan 2021 and 30th June 2021 saved £101.
Update 18 August: Inflation Rate Dips To 2%
The UK inflation rate slowed down last month according to the latest figures from the Office of National Statistics (ONS).
The Consumer Prices Index (CPI) rose by 2% in July, down from 2.5% a month earlier. The dip, driven by an easing in the price of clothing, footwear and recreational goods, means the inflation figure is now in line with the Bank of England’s official target of 2%.
Jonathan Athow at the ONS, said: “Inflation fell back in July across a broad range of goods and services, including clothing, which decreased with summer sales returning after the pandemic hit the sector last year.
“This was offset by a sharp rise in the price of second-hand cars amid increased demand, following a shortage of new models.”
Commentators say a dip in the headline inflation rate could be temporary. The Bank of England has forecast that consumer price growth could yet rise to 3% this month and peak around 4% later in the autumn.
Richard Hunter at Interactive Investor said: “The relief of a slowdown in inflation is likely to be short-lived, with upward pressures remaining in the pipeline.
“Cost inflation is still bubbling underneath the surface, both in terms of blockages in the supply chain elevating prices, as well as pressures on the labour supply. In addition, the proposed hike in energy prices will add some fuel to the inflationary fire as the year progresses.”
Despite a month-on-month fall in the CPI, Sarah Coles at broker Hargreaves Lansdown had this warning for savers: “Even at 2%, inflation can do serious damage to your savings, so we need to protect ourselves by refusing to settle for miserable rates from the high street (banking) giants. These usually offer 0.01% on easy access accounts, while the average (for all savings accounts) is 0.07%, and the most competitive without restrictions is 0.65%.
“Fixing your savings for 12 months will earn you up to 1.3%, which will significantly reduce the damage done by inflation,” she added.