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Highest inflation in a decade

UK prices rose by 4.2% year-on-year in October, above market expectations of 3.9%, and the highest rate of growth in a decade. One of the main drivers of October’s inflation was the rise in households’ energy bills, as the regulator caps on retail electricity and gas price increased. ONS figures show that annual gas prices increased by 28.1% and electricity prices by 18.8%. Higher annual prices for second-hand cars (22.8%), fuel (22.4%), restaurants (5.0%) and hotels (13.3%) pushed inflation up.

Many retail goods were also more expensive, furniture and household items in particular, while food inflation accelerated again in October. Clothing and footwear was the only category for which prices declined on the year.

Rising global prices for various commodities coupled with labour and raw material shortages meant that production costs have been pushed up for many businesses. Global commodity prices have been rising since November 2020, now almost 50% higher than a year ago. Shipping costs have quintupled since November 2019. Global food prices have seen double-digit increases on an annual basis since January 2021, and oil price reached a three-year record.

With supply chain pressures now filtering into final consumer prices, inflation is set to continue for the medium term. The Bank of England projects inflation to reach 5.0% in April of next year, when another rise in retail energy prices is expected, and to fall back to 3.4% in the last quarter of 2022.

The general rise in prices, and of energy bills in particular, has worried consumers and changed the mood in the economy. UK consumer confidence declined in October to their February levels, wiping out summer gains. This makes it very likely for households to rein in their discretionary spending. The GFK index saw a significant decline in October in intentions to make major purchases. As people worry about their financial situation, they will put off non-essential purchases to save more for rain days.

A potential slowdown in consumer spend is another headwind to the economic rebound, already confronted with shortages in production and heightened uncertainty. Moreover, the Bank of England signalled that it might raise interest rates to halt inflation. This would put the brakes further on the recovery, as the cost of borrowing would rise and would constrain business investment, which remained 12.4% below its pre-pandemic level in Q3.

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