Even the proverbial dogs on the street are aware that consumer prices are rising.  However, the rate of acceleration in UK CPI is still taking seasoned economists by surprise. The annual pace of CPI inflation jumped from 6.2% in February (a 30-year high) to 7.0% in March (still a 30-year high) which was above the 6.7% projected by City analysts. On a month-on-month basis prices rose by 1.1% relative to February, matching the record month-on-month increase posted last October. 

In a matter of weeks the CPI peak of 8.4% recorded in 1991 is expected to be surpassed. It is anticipated that we will see UK CPI eclipsing 9% y/y, an inflation rate not seen in the last 40 years. Indeed we could well see CPI hitting double-digits (10%+)later this year which would be five times the Bank of England’s inflation target!! 

The old measure of consumer prices – the Retail Prices Index or RPI – hit 9% last month which is its highest rate since June 1982. While the RPI measure may not seem as relevant as it once was it still is important. RPI is still used as an inflationary measure for index-linked government debt. Meaning the rate of RPI is the rate of interest paid. Mobile phone operators invariably uprate their annual charges with a 3% plus RPI (or CPI) measure. RPI is also used to determine the interest rate on student loans. Graduates will soon see their student loan debt interest rocket from 1.5% – 4.5% (depending on whether graduates are earning above or below £49,130 p.a.) to 9% (low earners) or 12% (high earners).  

Beneath the headline rates there were a range of record highs, or at least series highs. For example, Core CPI which excludes the volatile energy, food, alcohol and tobacco items saw its fastest rise since at least 1989 (+5.7%). Meanwhile the price of consumer goods (+9.4%) is running at more than twice the rate of consumer services and again is the highest year-on-year rise since the ONS series began. 

Re-energised – Rising energy costs saw the price of electricity and gas increase by 19.2% and 28.3% respectively. But these figures do not reflect the raising of the energy price cap in England & Wales. Energy price rises in Northern Ireland have not been deferred and would therefore be higher. Domestic home heating oil, which accounts for around two-thirds of NI households’ heating requirements, surged by 113.9% y/y. Petrol and diesel prices increased by 29.5% and 33.1% respectively in March.

Food for thought – Food price hikes are becoming more evident with food CPI rising from 4.9% in February to 5.8% in March. That represents the highest rate of food price inflation since September 2011. Unfortunately further food price rises are inevitable and we could well see the annual rate of food price inflation double in the coming months. Last week we learned that global food prices hit a record high in March with prices surging by 34% y/y. Some food products have already seen double-digit increases.  These include: – pasta products (+10.1%), lamb & goat (16.9%), low fat milk (14.2%), Olive oil (10.3%), Margarine (34.8%), ice cream (10.2%) and fruit juices (10.2%). Other staples such as bread are witnessing strong price rises (currently 5% y/y) with further increases in the pipeline. 

Double digit increases

Outside of food and energy, double-digit increases are becoming all too common. These include: –

• Household furniture 17.2%
• Materials for maintenance and repair of houses 15.6%
• Small electrical appliances 15.6%
• Second-hand cars 31%
• Airfares 15.4%
• Garden products 13.8%
• Cinema, theatre & concert tickets 14%
• Hotel accommodation 11.7%
• Articles for babies 11.5%
• Household contents insurance 16.1%

Some prices are falling

You might be forgiven for thinking all consumer prices are rising.  They are not. A selection of items, albeit a very small proportion of consumer items, recording year-on-year price falls are included below: –

• Pregnancy tests and contraceptive devices -0.7%
• Bus and coach fares -4.0%
• Mobile telephone equipment -8.0%
• Personal computers -4.8%
• Photographic equipment -3.7%
• Software -8.7%
• Purchase of pets -2.4%

Cost of living squeeze to intensify – The evolving cost of living squeeze is going to get worse before it gets better. Individuals receiving pay increases above, or even in-line with, inflation will be the exception rather than the rule.  Given the inflationary environment there has been a first mover advantage for those employers finalising ‘generous’ pay settlements early.  What was perceived as ‘generous’ a few months ago may now look miserable in light of inflation hitting 7% and beyond. The cost of living is just one consideration within pay negotiations.  The state of the labour market (see blog post below) is another. From an employer’s perspective labour conditions are the most challenging in decades. Skills shortages are prevalent across the economy with vacancies at record highs and unemployment close to record lows. The pandemic and working from home has loosened employees’ ties to their employer like never before. This has been one factor contributing to the so called Great Resignation alongside people seeking to reset their lifestyle and priorities. In the current labour market and cost of living environment, 12 months is a very long time to review pay and benefits. In order to retain talent and secure new employees we can expect to see more frequent reviews of pay and benefits packages.  In-year pay / bonus and benefit top-ups are likely to become more noticeable amongst employers in 2022/23.     

Timing is everything – The timing of some public pay negotiations over the next few months couldn’t be worse. Employee expectations and reality of what is affordable for public sector employers will continue to diverge. It is noted that pensioners and welfare benefits were raised by just 3.1% y/y this month.  Most public sector workers will do well to match that annual uplift. A pay rise of between 2%-3% is more likely and deemed ‘affordable’. If all public sector workers were given a pay rise in line with inflation that would necessitate a cut in thousands of jobs to pay for that. With CPI inflation set to exceed 9% and potentially go into double-digits, a summer of discontent and industrial action beckons.  

Security of labour supply is a growing concern

The context of this rampant inflation for employers is a very tight labour market. Northern Ireland’s latest batch of labour market statistics makes for pleasant reading. The unemployment rate in the three-months to February (2.5%) is just above the record low achieved at the beginning of the pandemic (2.3%).  The number of employees on local payrolls hit a fresh record high of 775,000 in March and redundancies are almost non-existent. Earnings growth, at least for employees, remains perky with pay for PAYE employees rising by 6.9% y/y for the median employee in March. That is keeping up with the cost of living for now. Although this year-on-year pay comparison includes the furlough period whereby wages for some employees were reduced by up to 20%.  As a result, the scale of the increase in pay is larger than what a true like-for-like comparison would be. 

So what’s not to like? 

While some indicators such as the HMRC payrolls figures have returned to pre-pandemic levels and beyond, others have not. The total number of individuals working in the three-months to February 2022 was 19,000 fewer than two years ago while the number of economically inactive (neither in work or looking for work) is 14,000 above December – February 2020 levels. Levels of self-employment are 25% below pre-pandemic levels and this largely explains why the total number of hours worked remains over 5% below the corresponding level two years ago. 

Improvements beneath the headlines

The latest statistics reveal that Northern Ireland’s employment and economic inactivity rates remain below and above their respective pre-pandemic rates.  However, these headlines conceal significant improvements that have occurred within different age-groups and depending on gender.   The female employment rate at 68.7% is above the corresponding rate in December – February 2020. This improvement has been driven by females within the 25-64 years of age category. More flexible family-friendly work practices, such as an ability to work from home, has enabled a greater proportion of females to enter or return to the workforce. But this improvement for females aged over 25 years of age compares with a slump in the employment rate of females aged 16-24 years of age from 54.1% in December – February 2020 to 45.1%  for the period December – February 2022.  The employment rate for males has also slumped by 10 percentage points for the 16-24 years of age category. Meanwhile only the employment rates for males over the age of 50 have returned to pre-pandemic levels so far. 

Security of supply of labour

In recent weeks and months the ideas of energy and food security have come to the fore.  For the Northern Ireland labour market a key challenge is securing an adequate supply of skilled labour. Survey after survey reveals acute skills shortages and recruitment difficulties.  Labour supply from beyond these shores has been stymied to a large extent by Brexit.  Increasingly local employers will have to look within the confines of the local labour market.  However, with unemployment close to record lows and only 1 in 7 of the economically inactive wanting a job, this is likely to be extremely limited supply. The cost-of-living crisis and benefits squeeze may see a shift in this attitude to work. Attracting workers from the Republic of Ireland and Great Britain is another option but they too are experiencing record vacancies. 2022 is expected to see significant churn in the labour market.  The cost-of-living crisis will act as a further incentive for people to change jobs if such a move means securing a higher salary. This makes it challenging for employers who will be increasingly under pressure to pay more to retain staff as well as attract new talent. For employers, both the unemployment and inflation rates are moving in the wrong direction.