UK’s Inflation Crisis Rolls On, Jolted By Energy Shock

The UK’s cost of living crisis escalated in April, when consumer prices rose the most since 1982.

The 9% YoY increase was the largest since the Thatcher era. Believe it or not, the headline print was actually “better” than expected. Consensus called for a 9.1% increase. At 6.2%, core was in line.

The National Statistics series began in January 1997. A constructed historical series started in 1989. To get context for April’s nosebleed headline print, you have to consult modeled data for prior years. Suffice to say inflation is very high (figure below).

There were a few comparable prints in the early 90s, but outside of that, double-digit levels in the 70s and 80s are your analogs. The peak was near 25% in 1975.

In projections published earlier this month, the BOE said inflation could hit 10% following another increase in the energy price cap later this year. April’s 54% increase was a gut punch to struggling households.

Housing and household services contributed a record 2.76pp to the annual increase in CPIH inflation last month (figure below). 1.86pp of that was attributable to electricity and gas.

Note that April’s surge in the contribution from the housing and household services component was more than double the jump associated with October 2021’s Ofgem cap increase.

With wholesale gas prices quadrupling over the past year, the 12-month inflation rate for electricity in the UK was 53.5%. For gas, it was 95.5%. Those rates were 19.2% and 28.3%, respectively, in March. Electricity and gas prices jumped 40.5% and 66.8% MoM in April, respectively. That’s the impact of the Ofgem price cap hike.

But it wasn’t just energy. Prices for food and non-alcoholic beverages rose almost 7% YoY. Prices for furniture and household equipment jumped 10.7% in the year to April. And recreation costs rose almost 6%, while restaurant and hotel prices moved up by 8.0% on the year.

It’s bad. Very, very bad. Rishi Sunak, under pressure, released the customary statement of condolences, but reminded the public that “countries around the world are dealing with rising inflation.” The UK government, he said, “cannot protect people completely from global challenges.”

Although growth in average total pay including bonuses was 7% in the first quarter, and 4.2% excluding bonuses, real average earnings are falling at the swiftest pace in nearly a decade (figure below).

The labor market is extraordinarily tight. There are now more vacancies than people counted as unemployed in the UK, a similar situation to that seen in the US. Employers’ desperation is reflected in the 7% figure mentioned above. In March, pay including bonuses rose almost 10%, the largest increase ever. Unemployment is the lowest in almost 50 years.

Whether CPI has peaked is up for debate. “A lot hinges on the next energy price cap announcement in October, which we expect will deliver around a 40% increase in prices — or 30% once the government’s £200/household rebate is factored in,” ING’s James Smith said Wednesday. “We don’t yet know exactly how that subsidy will be treated in the CPI figures, and while it is simply an accounting point, it might hold the key to answering whether we’ll get a second ‘twin peak’ in inflation later this year,” he added.

RPI rose 11.1% in April, also a 40-year high. That’s problematic because RPI shocks drive the UK’s interest payment burden higher, a scenario that’s compounded (figuratively and literally) by higher debt loads.

PPI, meanwhile, jumped 14% last month (figure below). That was the highest since 2008. Had output PPI been 0.3pp higher, April’s annual growth rate would’ve been the highest since 1980.

Food was the biggest contributor to the annual increase. Food product prices rose 8.8% on a 12-month basis in the PPI series.

Needless to say, the burden of this falls most heavily on the poor. So-called “K-shaped” inflation is just as real in the UK as it is in the US.

“Food banks have reported an increase in demand for food packages after the rise in energy bills, while many small business owners have said a combination of higher costs and tax increases have pushed them to the edge of bankruptcy,” The Guardian noted, adding that data from the Resolution Foundation suggests the poorest tenth of UK households are already experiencing double-digit inflation, while the implied rate for the top 10% of earners is lower, at 8.7%.

The Institute for Fiscal Studies, a thinktank, reckoned the annual rate for the poorest households is probably near 11%.