Economy and Business News for Aug. 17, 2022

Rising food prices pushed the annual inflation rate into double digits for the first time in four decades. Food prices alone rose 2.3 percent from June to July, the fastest monthly increase in 21 years, with notable increases among staples like bread, cereal, milk, cheese and eggs.

The surge in checkout prices comes as a contest to be Britain’s next prime minister has left the country in a leadership vacuum, and policy responses remain unsettled.

Overall, inflation rose more quickly than economists had expected, with prices rising 0.6 percent from the previous month, the Office for National Statistics said on Wednesday. The annual rate of inflation was 9.4 percent in June.

Rising prices have become an intense global problem troubling households and central bankers from Australia to the United States, and are multiplying the challenges facing lawmakers. Many countries are experiencing multidecade highs in their inflation rates, with pandemic-related supply chain disruptions pushing up the price of traded goods, and then Russia’s invasion of Ukraine setting off an energy crisis, particularly in Europe.

Still, Britain’s inflation rate stands out. Prices are rising faster than in the United States (8.5 percent) and the eurozone’s largest economies: Germany (8.5 percent), France (6.8 percent) and Italy (8.4 percent).

There are signs that inflationary pressures are becoming more persistent as price increases reach deeper into the British economy, and as more businesses pass on cost increases to their customers. Energy prices have been a major driver of inflation for months, but the rising price of food has emerged as a key contributor as well.

Bubbling up as another risk is Britain’s tight labor market. Companies are competing for staff by raising salaries and offering large bonuses, bringing wage growth above recent historical averages and adding to inflation pressures.

Credit…Frank Augstein/Associated Press

Once food and energy prices are stripped out, the inflation rate rose 6.2 percent in July, up from 5.8 percent the previous month. This rise in so-called core inflation “is a concerning signal for the potential longevity of the current inflation spike,” Sandra Horsfield, an economist at Investec, wrote in a note.

There are some signs that supply chain problems, which had been a major driver of inflation among goods, were easing, suggested by a fall in the annual price growth of furniture, household goods and used cars.

But “such silver linings to this report are few and far between,” Ms. Horsfield said.

Restaurant and hotel prices rose by 9 percent in July, the fastest annual increase in 30 years, the statistics agency estimates. Price increases for services — a broad category that includes haircuts and public transport, and one less directly influenced by global prices — rose 5.7 percent in July, far exceeding its 2 percent average over the past decade.

Inflation is still a couple of months away from its expected peak in the autumn, when Britain’s cap on household energy bills is set to rise. At that point, the economy could enter a long recession as high energy prices lead to a drop-off in consumer spending and restrain businesses, according to the Bank of England’s forecast.

The data released on Wednesday adds to the troubles of the central bank, which is tasked with bringing inflation back down to its 2 percent target. Policymakers have been raising interest rates since December to slow spending as inflation has regularly outpaced expectations. And this month, they increased rates by half a percentage point, the biggest jump in 27 years, in a bid to slow price increases.

But the outlook for the economy has turned sour. In the second quarter, economic output contracted slightly, losing momentum before what is expected to be a difficult winter for many. There is a risk that the central bank will tighten monetary policy too excessively in response to rising prices and worsen an economic downturn. Inflation could fall below the bank’s target as international influences on inflation ease and domestic price pressures decline amid a weak economy, the bank said.

“The mix of high near-term inflation and weak activity leading up to a recession is a challenging backdrop for monetary policy,” Andrew Bailey, the governor of the central bank, said earlier this month.

Nonetheless, the central bank is expected to keep raising interest rates as inflation marches higher, despite its warnings of a recession.

Credit…Andy Rain/EPA, via Shutterstock

For now, the relentlessly rising rate of inflation is sounding an increasingly loud alarm about a cost-of-living crisis, as the price of more goods, including groceries, and services rise. Households are being warned that the average energy bill could climb to 3,500 pounds (about $4,240) a year in October, triple what it was a year ago.

“We are buying less because we are trying to save money,” said Ali Khan, a 40-year-old Uber driver living in south London. He used to spend £50 food shopping for his family; now the same basket costs him £75. “The prices are going up and up every day,” he said Wednesday. “I am very worried.”

As households wait for confirmation of the change in energy bills later this month, they are also waiting to find out who will be the next prime minister. The winner of the contest in the Conservative Party for the top job won’t be announced until Sept. 5, and the current caretaker government is making no new commitments to ease the burden on households.

The next prime minister will be either Liz Truss, the foreign secretary and current front-runner, or the former chancellor of the Exchequer, Rishi Sunak. Economic policy has been one of the main dividing lines between the two contenders, with Ms. Truss prioritizing tax cuts to spark Britain’s economy into growth, rather than direct payments, and Mr. Sunak arguing that inflation must be curbed before taxes can be reduced.

“The most important issue facing our country in the short term is how are we going to get through this winter,” Mr. Sunak said on Wednesday, answering questions from party members in Belfast. “We have to support vulnerable groups, those on low incomes and pensioners, directly with financial support, because a tax cut does not work for those people.”

Earlier in the day, Ms. Truss said she wanted to “immediately” cut taxes and remove a green energy levy from energy bills. “What won’t work,” she said, according to The Guardian, is “handing more money out without dealing with the root cause” of energy security.

The anger and stress over the rising cost of living has continued unabated. This week, train operators and rail staff across the country plan to strike again over pay and working conditions. They will soon be joined by dock workers at some of the country’s largest ports and postal workers, who are walking off the job to demand pay more closely aligned to inflation.

On average, wages across the country are growing more than twice as fast as they did on average in the decade before the pandemic, but they still aren’t keeping up with prices. Adjusted for inflation, pay excluding bonuses fell by 3 percent in the year through the second quarter, the statistics office said on Tuesday. It was a record decline.

“The situation is miserable for U.K. consumers, who are currently being squeezed from all sides,” Kallum Pickering, an economist at Berenberg Bank, wrote in a note. “Wages are not rising fast enough to offset surging inflation, but they are rising too fast” for the central bank’s liking, he added.

Euan Ward and Stephen Castle contributed reporting.