Inflation to climb again in fiscal headache for Sunak

Inflation in the UK will accelerate to its highest rate since 1991, according to bets placed by City economists on Wednesday’s fresh data released ahead of Chancellor Rishi Sunak’s spring statement.

The rate of price rises will breach six per cent, new figures from the Office for National Statistics (ONS) will show.

Rising energy and petrol prices are not just sending consumer prices higher, but are also raising businesses’ costs by thousands of pounds.

Electricity and gas bills among London firms have swelled around £7,000 and £3,500 respectively over the last year, according to the Federation of Small Businesses.

Soaring rent costs compounded by a sharper than usual rise in clothing and furniture prices will push inflation above six per cent, analysts at Deutsche Bank are predicting.

An ongoing surge in second-hand car prices caused by a shortage of semiconductor chips choking production of new vehicles will drive a large chunk of the inflation increase, Paul Dales, chief UK economist at Capital Economics, thinks.

However, most analysts are baking in even further surges in the cost of living in the coming months, triggered by Russia’s invasion of Ukraine putting a rocket under oil and gas prices.

Economists at KPMG are forecasting double-digit inflation in October, sparked by the price cap on energy bills rising again to account for higher wholesale energy costs. 

The cost of living could still be as high as seven per cent in December, Dales added.

Elevated inflation adds to the list of headwinds Sunak is grappling with as he prepares to announce new economic forecasts and fiscal measures at the spring statement on Wednesday.

Speculation is growing over whether the Chancellor will step up support for households who are bracing for the toughest cost of living crunch in a generation.

A cut to fuel duty or an uptick in the council tax rebate are seen as the most likely forms of support that Sunak will announce.

Living standards may drop at the steepest rate since the 1970s, caused by swelling energy bills, tax hikes and historically high inflation.

Accelerating prices will eat into Sunak’s fiscal wiggle room by sending the government’s debt interest bill higher.

A large chunk of the UK’s stock of debt is linked to the retail price index, an old measure of the cost of living, meaning rises in inflation lifts the amount the government has to spend on servicing its debt.