Inflation has hit 9.4% as households continue to be rocked by soaring food and energy bills. the latest Office for National Statistics (ONS) figures have revealed.
The figure is up from the 9.1% seen in May and comes amid warnings that inflation could increase above 11% in October when the energy price cap is adjusted.
At 9.4% inflation now stands at 40-year high having seen the largest annual increase since February 1982.
Inflation has already wiped out wage growth. UK workers suffered a 2.8% real pay cut between March and May (adjusted for inflation and excluding bonuses) – the biggest fall since records began in 2001, according to the Office for National Statistics.
Yesterday Bank of England Governor Andrew Bailey warned that a half-point interest rates increase was “on the table” for next month, as the central bank continues to try and tackle runaway prices.
Reaction
Paul McGerrigan, CEO at FinTech brokerage Loan.co.uk:
“This shows the continued surge in inflation is by no means tapped out and there is more uncertainty and instability to come whilst ever Russia’s aggression chokes off oil, gas and staple food supplies to the wider world.
“The Bank of England warns rates are set to hit 11% when the domestic energy price cap is lifted in October, but with current domestic supply chain disruption, labour shortage and rapidly increasing energy prices, we may expect rates to continue on towards 12%, stifling the chance of recovery post pandemic.
“In this crucial time for the nation we need solid leadership which can be trusted and relied upon to do its best to tackle those elements within our control, and it is vital that this Conservative Government rectifies its leadership issues and gets back to the task of leading the country in this challenging time.
“It is also time to intensify efforts to bring the conflict in Ukraine to a resolution. Only after stability is restored will inflation drop, and the standards of living of millions of people start to recover.”
Simon Webb, managing director – capital markets and finance at LiveMore:
“As expected inflation has gone up in June to 9.4%. Until we can get some clarity on when inflation will start to stabilise, the financial markets will be choppy and pressure will continue on the Bank of England to increase the base rate.
“The Bank has said it expects inflation to carry on rising this year and will start to slow down next year; and take around two years to be nearer to the 2% target. But with so much uncertainty in the world today, it’s difficult to predict.
“However, I think it is likely the base rate will increase again at the next MPC meeting, and there has been speculation that it could be a 0.5% rise instead of 0.25%. That’s even more reason for borrowers to lock into a longer-term fixed rate mortgage knowing that monthly payments won’t change for a long period of time.”
Lewis Shaw, founder of Mansfield-based Shaw Financial Services:
“We are in an economic cyclone and neither the Bank of England nor the politicians running this country have a clue what to do. Instead of working in the nation’s interests, the Tory party is navel-gazing and the Bank of England has tentatively upped rates, which has achieved nothing and simply added fuel to the fire.
“Our politicians and the Bank of England are fiddling while Rome burns, and they seem to have no idea how painful this is for the average family struggling to make ends meet.
“Worst of all, it’s set to get a whole lot worse with the rising energy price cap, and more problems are coming down the tracks with further price shocks in food due to the war in Ukraine. The country needs a reset, and it needs it now.”
James Miles, director of Exeter-based broker, The Mortgage Quarter:
“As a mortgage broker, I’m seeing a lot more inflation-fuelled anxiety and uncertainty from people when they’re looking for a house. They’re unsure about how to budget and find it difficult to predict how much all their bills will be in a new home, and that’s before a massive hike in their expected mortgage payments.
“The Bank of England increasing rates is simply exacerbating the problems people and businesses are facing. The current inflation we have is a supply problem throughout the world, not a result of the spare disposable income people have.
“People on low incomes are being hit for six and getting themselves further into poverty. We need some business-minded, economically educated leaders working out the right response. Sadly they are few and far between.”
Sarah Coles, senior personal finance analyst, Hargreaves Lansdown:
“Inflation has hit another 40-year high, powered by horrible rises in the price of energy, fuel and food. These are not only the kinds of costs that we find incredibly difficult to cut, they’re also the ones which are less likely to be controlled by higher interest rates. And price rise pain is far from over, because the Bank of England expects it to peak at 11% in October.
“The horrible impact of rising energy and fuel prices is clear from the fact that core CPI – stripping out energy, fuel, food, alcohol and tobacco – is 5.8%. This has actually dropped back for the past two months, while overall inflation reached a new high. It’s this core inflation which is most likely to be tackled by the Bank of England raising interest rates, which begs the question of whether this can really achieve what it needs to at a time when inflation is being dictated so dramatically by energy and fuel prices.
“Figures out yesterday revealed estimates for June wage rises averaged 6.6%, so pay will have fallen even further behind runaway price rises. Politicians are keen to prevent a wage spiral, which risks feeding into even more inflation, so workers are being forced to bear the brunt of the pain.
“The cost-of-living payments have been designed to offset some of this pain, but for the millions of people who are already struggling, life is going to get far harder. Over the next 12 months, the number of people who have enough cash left at the end of the month to be resilient will crash from around half to about one in ten (Source: HL Savings and Resilience Barometer). And while those on the lowest incomes will face the biggest challenges, even those who consider themselves relatively comfortable will start to struggle.”
Samuel Mather-Holgate of Swindon-based Mather & Murray Financial:
“Most of the inflation in the UK is ‘imported’, meaning that the Bank of England and the Government cannot really influence it by interest rate movements or fiscal stimulus.
“The cost of energy and food is set by world markets and a percentage increase in interest rates won’t do anything about it. However, a further cut in fuel duty VAT could have the opposite effect.
“It would help consumers at a time of real stress, but will cut costs to business logistics and help keep prices down. I think that the next Chancellor will seriously look at this option, as it’s one of few good ones they will have.”
Graham Cox, founder of the Bristol-based broker, SelfEmployedMortgageHub.com:
“Further substantial rate rises from the Bank of England now appear inevitable. The Fed’s aggressive monetary tightening, with possibly a 1% interest hike very soon, is pumping the Dollar to new heights against a basket of currencies.
“It reached parity with the Euro last week, and Sterling is sharply lower against the greenback as well. All of which makes dollar-denominated commodities and goods, like oil, more expensive to import into the UK, further piling on the inflation misery.
“So I don’t think the Bank of England can afford not to increase rates. I think Rishi Sunak as Chancellor did some good things, but he’s lost the plot with all the tax and NI hikes. Increased productivity and investment in growth industries are the way out of the massive hole we’re in, not taxing everyone until the pips squeak.”
Rob Peters, director of Altrincham-based Simple Fast Mortgage:
“It’s all about ‘give and take’ in terms of Governmental policies and there seems to be a lot of ‘take’. Whilst it is accepted that rate rises are inevitable (and probably needed) the additional tax and National Insurance increases are badly thought out and ill-timed.
“Through IR35 reforms, the Government has already pushed small consultants out of the market effectively branding them as business ‘frauds’.
“As for the very recent Government advice that businesses should cut their marketing budget, now is arguably the time a marketing budget is needed more than ever. It’s almost as though the Government has not conception of small business at all.”
Ed Rimmer, CEO of Bath-based SME finance provider, Time Finance:
“Whilst we seem to have become accustomed to the news of inflation rising month on month, more and more businesses are feeling the strain and are struggling to make ends meet.
“When inflation hit 9.1%, one in ten businesses we spoke to told us that they were unable to meet their financial commitments and a further one in five were struggling to remain competitive without rising their own costs. These were alarming statistics at the time, and it’s unsettling to consider how this will deteriorate if the Government doesn’t intervene soon and provide businesses breathing room to regain financial control.
“Encouraging firms to reduce their prices fails to tackle the root of the issue. Businesses simply don’t have the financial capacity to absorb their rising costs, and without proper and viable support their overheads will be squeezed ever tighter.
“Not only will they struggle to keep up with operational costs such as paying their employees or suppliers, and buying stock or materials, but some, sadly, simply won’t survive.”
Stuart Wilson, chief executive officer at Air:
“For many, today’s announcement may point towards a turbulent economic future for the UK. Climbing energy bills and stressed supply chains are driving inflation upwards to record heights, especially compared to the figures from previous month’s indices.
“So for those who are considering borrowing in later life, either to help boost retirement income or even perhaps to help mitigate existing debt, it has never been more important to get expert, tailored advice from a specialist.
“In the coming months, advisers will likely find themselves being approached by more and more older clients looking to achieve some peace of mind during these economically testing times, perhaps by exploring how they can use their housing wealth.
“Although later life lending will not be an appropriate option for all of these people, as the range of available later life lending solutions grows and with more flexibility built into these products than ever before, advisers are well placed to start the conversation and ensure clients receive the right advice to decide whether equity release is suitable for their financial situation, having explored all available options the customer has.”
Kevin Drew, managing director of Derby-based accountancy firm, Ascentant Accountancy:
“Inflation has hit our small accountancy practice, from our landlord hiking our energy bill quickly, which wasn’t in our cashflow forecast, to the small things like the reams of paper we go through that have doubled in price.
“For the first time in our 6-year operating history, we passed on a modest 4% price increase to our clients recently. We didn’t want to, it was a case of having to and we assessed the risk of losing clients and did actually lose one, which was far from ideal.
“Some of the things we do regularly as a team have been reduced, like our team lunch and learns (because pizza deals are few and far between nowadays meaning a £80 bill is a bit much every week alongside all the other benefits we provide staff).
“Some of the initiatives like the employment allowance increasing in the last Budget has been helpful, as has the employee NI contribution, but it’s been completely eaten up by the cost of diesel and petrol for travelling to work, increase in food prices and of course home energy bill increases.
“So our staff were given with one hand but taken away with the huge inflation prices and it’s all totally outside of our control.”
Ross Gandy, UK managing director at Estateguru:
“Yet another increase to inflation spells bad news for the UK’s SMEs. Small businesses with strict budgets are under growing financial pressure, contributing to a rise in demand for working capital.
“However, somewhat ironically, it becomes much harder for SMEs to secure financing during times of economic challenge.
“Financial turbulence causes nervousness among traditional banks and their strict lending criteria often automatically blocks SMEs from securing the funding they need.
“Small businesses that find themselves in this situation can turn towards alternate lending as a second option.
“Alternate lenders use a holistic approach to underwrite each application on a case by case basis, factoring in a SME’s needs to find a solution that’s most effective for the business.
“Alternate lenders recognise that the tick box method used by traditional banks isn’t inclusive to start-up businesses still finding their feet and they instead adopt a more considered approach to generate the best result for their client.”
Adrian Lowery, financial analyst at investing and coaching platform Bestinvest, commented:
“This latest rise in inflation for June was a touch higher than expected but that will not materially alter the outlook for household finances or the Bank of England’s rate setters. The latest increase will though be used as leverage by unions and employees in wage negotiations with employers, particularly as earnings data yesterday showed average real pay falling by an annual 2.8% as salary rises were outstripped by inflation.
“This is the ninth rise in inflation in as many months, and the struggle for many families will be the rapidity of cost of living increases and the sudden adjustments to the household budgets that it is necessitating. We still have October’s energy price cap increase to come when inflation is expected to peak – but another of the more serious cost rises that some households need to prepare for will arise when they come to remortgage.
“This time in 2021, the average two year fix was at 2.55 per cent and the average five year at 2.78%, 1.19% and 1.11% lower than today’s rates of 3.74% and 3.89% respectively, according to Moneyfacts. Given the speed of rate rises this year, as the mortgage market catches up it is not unrealistic to see the average five-year fixed rate at 5% next year. A household with a £200,000 mortgage at 2.78% will currently be paying £926 a month: if they were to remortgage to a deal that was charged at 5.0% their monthly payments would rise by £244 to £1,170 – that is an increase of 26.3%.
“There are two things mortgage borrowers can do to mitigate against this. One is to switch to the current best deal as soon as they can – and this will usually be three to six months before their fixed-rate mortgage deal is due to expire. The second is to consider overpaying on their mortgage in order to bring it down a loan-to-value bracket – e.g., from 75% to 70% – before they remortgage, as this will get them a better rate.
“Interest rates could rise sharply next month. Bank Governor Andrew Bailey yesterday repeated that a half-point increase in the bank rate (which would be the first since the Bank gained operational independence in 1997) is an option for August’s announcement from the monetary policy committee. That comes after five consecutive 25 basis point rate hikes as the MPC has targeted rising inflation in recent months.
“Bailey said that a 50 basis point increase will be among the choices on the table but that it is not ‘locked in’. He added, however, that the economy was already slowing. Financial markets are pricing in a 94% chance that the MPC will raise the benchmark rate to 1.75% from 1.25%. Expectations in money markets for rates in a year’s time have recent varied vary between 3.0% and 3.5%. Much will depend on the health of the real economy.”
