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Friday, January 28, 2022

Inflation fears are fuelled as headline CPI rate surges to 3.2% in August


Inflation fears were fuelled today as the headline CPI rate recorded its largest jump ever in August to 3.2 per cent.

The consumer prices index rose above the expectations of analysts to reach its highest level for more than nine years. 

The rate is far above the 2 per cent target set by the Bank of England, which has insisted the spike will be temporary. 

Experts have pointed to the warping effects of Rishi Sunak‘s Eat Out to Help Out scheme, which slashed prices last summer.

The Office for National Statistics suggested the discounts a year ago had added 0.3 percentage points to the increase. But petrol and used car prices also contributed heavily.     

It again raises the spectre of prices running out of control in the wake of the pandemic. 

Rising prices will heighten the pain for struggling families as restrictions continue to devastate whole sectors of the economy. 

One of the few tools for central banks to control inflation is raising interest rates, which feeds through to mortgages.  

Inflation also poses a huge threat to the government, which is borrowing hundreds of billions of pounds during the crisis and could face higher interest payments for the UK’s £2.1trillion debt mountain. 

Both the US Federal Reserve and the Bank of England have insisted that the inflationary pressure will be temporary. 

It emerged yesterday that the American annual CPI rate dipped slightly to 5.3 per cent in August, although it is still historically high after the Biden administration implemented a massive stimulus programme to help the Covid recovery.   

The consumer prices index rose above the expectations of analysts to reach its highest level for more than nine years

The relative increase in prices at restaurants from the heavy discounts of summer 2020 contributed significantly to the inflation spike

The relative increase in prices at restaurants from the heavy discounts of summer 2020 contributed significantly to the inflation spike

Used car prices are also sharply higher as the pandemic causes issues across the economy

Used car prices are also sharply higher as the pandemic causes issues across the economy

How inflation threatens families and the public finances 

Inflation has long been seen as one of the biggest threats to economies.

In extreme examples, it has spiralled out of control and sparked panic.

The German Weimar Republic effectively collapsed after the value of the mark went from around 90 marks to the US dollar in 1921 to 7,400 marks to the dollar in 1921.

In Zimbabwe between 2008 and 2009 the monthly inflation rate was estimated to have reached a mind-boggling 79.6billion per cent.

Although inflation has faded in the minds of Britons who have become used to ultra-low interest rates and stable prices, it caused chaos in the 1970s.

Deregulation of the mortgage market, the emergence of credit cards and an overheating economy drove the rate to an eye-watering 25 per cent in 1975.

People would rush to buy goods with their wages after pay-day, as the costs were rising so quickly.

Strikes erupted as there was pressure for pay packets to keep pace with prices. 

Unemployment rose as the economy tipped into recession, and the government had to pump up interest rates in a bid to control the surge. 

That meant mortgage interest payments spiked into double digits. 

That meant servicing the national debt became a serious problem.

The Office for National Statistics (ONS) said CPI jumped from 2 per cent in July to 3.2 per cent in August, the highest since March 2012 and the biggest monthly increase since records began in 1997.

The ONS said apart from the Treasury-funded discounts last summer there was also likely to have been some impact from the supply chain crisis on inflation last month, which it said helped push up food and non-alcoholic drinks prices.

Average petrol prices stood at 134.6p per litre last month, the highest since September 2013, and compared to 113.1p per litre in August 2020.  

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.

‘However, much of this is likely to be temporary as last year restaurant and cafe prices fell substantially due to the Eat Out to Help Out scheme, while this year prices rose.

‘Food and non-alcoholic drink prices rose by more than last year, which also helped push up the rate.’

The ONS figures showed that Eat Out to Help Out from a year ago, as well as the temporary VAT cut, had the biggest impact on August CPI, with restaurant and hotel inflation soaring by a record-breaking 8.6 per cent.

Mr Sunak launched the scheme last year to help the embattled hospitality sector recover as the economy reopened after lockdown, offering diners up to 50 per cent or £10 each off at pubs, cafes and restaurants.

But the ONS said the impact should reverse next month, given that the scheme only ran for one month in 2020.

The ONS data also showed that food and non-alcoholic drink prices surged 1.1 per cent month on month, or 0.3 per cent over the year.

Global supply chain issues, combined with a lorry driver shortage in the UK, has been leading to pressure on availability of raw materials and retail stock, leaving supermarket shelves increasingly bare in recent weeks.

Builders have also been reporting delays and higher prices across materials including cement, steel and bricks.

The ONS added that the Retail Price Index (RPI), another measure of inflation, increased to 4.8 per cent last month.

Shadow Chief Secretary to the Treasury Bridget Phillipson said: ‘People are already feeling the effects of inflation, in their weekly shop and at the petrol pump.

‘The Government must do all it can to secure the supply chains that keep our economy going, and shouldn’t be hitting families with a devastating cut to Universal Credit and tax rises.’ 

Experts have pointed to the warping effects of Rishi Sunak's Eat Out to Help Out scheme, which slashed prices last summer

Experts have pointed to the warping effects of Rishi Sunak’s Eat Out to Help Out scheme, which slashed prices last summer



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