A shock jump in inflation last month has sparked fears that Britain could face a cost of living crisis as the impact of the recession hits people hard in their pockets.
With further mass job cuts on the cards as the Government’s furloughing scheme comes to an end in the autumn, higher prices for products like fuel, clothes and shoes look set to take their toll.
‘Inflation is showing signs of a V-shaped recovery – not what consumers need at all’, Jeremy Thomson-Cook, chief economist at Equals Money, warned today.
Crisis? Higher inflation puts extra pressure on people struggling to make enough money
Thomson-Cook added: ‘A period of rising inflation alongside the other well-known issues that the UK economy has to navigate in the coming months – an end to the furlough scheme and a decision one way or the other on Brexit – would make things even more painful for those whose incomes have been hit by the pandemic.’
Speaking to This is Money, Laura Suter, an analyst at AJ Bell, said: ‘The timing of the rise in the cost of goods is unfortunate, when millions of people are expected to lose their job and face a crunch to living standards.
‘Inflation had been expected to fall this year, with the Bank of England predicting it would hit 0.25% and stay low for the remainder of the year. But today’s leap shows how hard it is to forecast economic data at the moment.
‘Any increase in inflation is particularly unwelcome as the unemployment rate is predicted to almost double before the end of the year.
‘The headlines are already filled with stories of companies laying off thousands of jobs and this is expected to rise further as the furlough scheme is unwound.
‘If prices rise just as people are losing their entire income, households will face a real squeeze. Even if you’re able to keep hold of your job, wages are likely to either stagnate or fall this year, meaning that any rise in prices will not be met by a rise in income.’
The scale of job losses hitting the country has been laid bare in recent weeks, with Marks & Spencer confirming this week that it plans to axe around 7,000 jobs in three months. John Lewis has warned that 1,300 jobs could be cut across its business, while Boots and WH Smith look set to cull 4,000 and 1,500 jobs respectively.
Data: inflation data in the UK since July 2010, according to the Office for National Statistics
Job cuts: Marks & Spencer is cutting 7,000 jobs over the next three months
UK consumer price inflation jumped to 1 per cent in July, up from 0.6 per cent in June, amid higher prices for fuel, clothes and shoes. Economists had been expecting inflation to drop last month.
Keen to rake in as much cash as possible, many clothing retailers have opted not to dish out deep discounts or summer sales to shoppers as they normally would at this time of year.
Consumers are also paying the price for the PPE required for staff at businesses like dentists, physiotherapists and hairdressers.
The Office for National Statistics said: ‘Health prices overall rose by 1.0% between June and July this year, compared with a rise of 0.1% a year ago.’
RPI inflation rose to 1.6 per cent in July, up from 1.1 per cent in June. This rise is disappointing for rail commuters as the July RPI rate will be used to set the increase in regulated train fares in January next year.
While in one respect, the rise in inflation suggests that pockets of the economy are springing back to life, a degree of caution is needed.
‘No one should confuse July’s surge in inflation with a return to rude economic health’, Richard Berry, founder of Good Money Guide said.
He added: ‘The prospects of British consumers spending their way out of recession still look slim.’
Meanwhile, the Centre for Economic and Business Research thinks the upturn in inflation looks set to broadly continue this year and next year.
Sam Miley, an economist at the Cebr, said: Our latest forecasts point to a further acceleration in price growth, facilitated by economic stimulus measures and the wider improvement in economic sentiment.
‘As such, we would expect the upward price growth trajectory seen in the past two months to largely continue for the rest of the year, approaching the Bank of England’s 2.0% target in early 2021’.
Many businesses, particularly those in the hospitality of ‘personal services’ sectors, have upped their prices in a bid to boost their margins after months of enforced temporary closure during lockdown.
Miley added: ‘Businesses may be tempted to raise prices to compensate for months with no revenue at all.’
Targets: The Government’s inflation target is currently set at 2%
What does the Bank of England think will happen to inflation?
Earlier this month, the Bank of England said it expects inflation to fall to -0.3 per cent in August.
Looking further ahead, the BoE said: ‘CPI inflation is expected to fall further below the 2% target and average around ¼% in the latter part of the year, largely reflecting the direct and indirect effects of Covid-19.
‘These include the impact of energy prices and the temporary cut in VAT for hospitality, holiday accommodation and attractions.
‘As these effects unwind, inflation rises, supported by a gradual strengthening of domestic price pressures as spare capacity diminishes. In the MPC’s central projection, conditioned on prevailing market yields, CPI inflation is expected to be around 2% in two years’ time.’
Meanwhile, Howard Archer, chief economist at the EY Item Club, said he thinks inflation will fall back ‘appreciably’ in August as the hospitality sector’s six-month VAT cut from 20 per cent to 5 per cent takes effect.
‘The EY ITEM Club suspects inflation could get down to a low around 0.2% over the next few months’, Archer said.
He added: ‘The rise in inflation in to 1.0% July significantly dilutes the chances that it could temporarily turn slightly negative over the coming months as the Bank of England had suggested is possible.
‘The EY ITEM Club expects inflation to rise gradually during 2021 as the recovery gains traction. However, inflation is unlikely to rise sharply next year and it could well be around 2.0% by the end of 2021.’
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