The annual pace of UK CPI inflation accelerated from 5.1% in November to 5.4% in December representing the highest rate since March 1992 (+7.1% y/y). UK inflation had peaked at 8.4% in April and June of 1991. Consumer goods inflation (+6.9% y/y) is running at twice the rate of consumer services inflation and is at its highest rate since July 1991 (+7.0% y/y). Goods inflation is expected to breach its record high of 7.4% y/y (Sep/Oct-90) in the coming weeks. Consumer services inflation (+3.4% y/y) remains more subdued by comparison and is at an eight-and-a-half-year high. By comparison, consumer services inflation was running into double-digits in late-1990 and 1991 and peaked at 12.1% in April 1991. Services inflation will be closely watched in the coming months as the strength of pay settlements will feed into this measure. Wage increases will also filter through into the cost of consumer goods.
Second-hand cars amongst key drivers of rise
Energy costs and the price of second-hand cars have been key drivers of inflation in recent months and were again prominent in the latest figures. Indeed, second-hand cars recorded their largest year-on-year increase on record in December (+28.6% y/y). However, price rises were broad-based across goods and services. The acceleration in food price inflation is particularly concerning for those on lower incomes. Food prices recorded their biggest monthly rise in nine years in December (+1.4% y/y) with the annual rate of inflation jumping from 2.4% in November to 4.5% last month. The latter represents the steepest rise in over eight years. Bread and milk prices are running at 4.4% y/y while those with a penchant for ready-meals will note that prices have soared by close to 12% over the last 12 months.
Further food and energy cost rises expected
Unfortunately consumer prices are set to push considerably higher in 2022. Further food & energy cost rises are expected to push the headline CPI annual inflation rate to 7% in April. It is worth remembering that September’s CPI rate (3.1% y/y) is used to set the increase in welfare benefits, such as Universal Credit payments. Similarly the majority of people working are unlikely to see wages keep up with inflation and will therefore also see a significant fall in their standard of living. Clearly those that can least afford it will experience the biggest squeeze in their cost-of-living. Inflation will be just one part of this squeeze, with tax rises the other. National Insurance Contributions are set to rise by 1.25 percentage points next April while income tax thresholds will be frozen for 4-years. The cost-of-living crisis is set to be the dominant economic story in 2022.
Could Sunak do ‘something big’?
Just as Rishi Sunak surprised us all with the Job Retention Scheme, expectations are being raised for him to do ‘something big’ to insulate households from the savage energy cost increases that are still to be felt. We can expect the Chancellor to at least take some of the rough edges off the evolving cost-of-living pressures in the coming weeks. Indeed supporting households is likely to be the main theme of the next Budget on 23 March. Will we see a windfall tax on energy companies? A temporary cut in the 5% VAT on domestic energy bills? A return of the temporary £20 uplift in Universal Credit? A deferral in the planned hike in National Insurance Contributions in April? We will have to wait and see what Rishi ‘Whatever it takes’ Sunak does next. .
Selected items y/y inflation rates in December 2021
· Consumer goods 6.9%
· Consumer services 3.4%
· Food 4.5% with Bread, Meat & Milk all 4.4%, Poultry 8.5% and Ready-made meals soaring by 11.6%
· Clothing 4.5%
· Electricity 18.8%
· Gas 28.1%
· Liquid fuels (home heating oil) 52.2%
· Petrol 27.8%
· Diesel 25.8%
· Furniture and furnishings 12.0%
· 2nd-hand cars 28.6%
· Bicycles 15.3%
· Products for Pets 5.4%
· Airfares 28.8%
· Accommodation services 15.5%
· Articles for babies 13.8%
· Postal Services 5.6%
· Camping Equipment 13.7%
· Cinema’s, theatres & concerts 10.8%
· Dental services 4.1%
· Materials for maintenance & repair of houses 13.9%
· Refrigerators / fridge-freezers 15% and irons 21.5%
· Airfares 28.8%