Why today’s inflation numbers are much, much worse than you think

Inflation in the UK has trimmed to its lowest level in over a year. It has also dropped out of the double digits for the first time since last August. Hooray!

These are milestones that shouldn’t be welcomed with much joy, especially given that outside of the last 18 months or so, inflation barely budged higher than four per cent for about 30 years.

As a measure of just how tough this price surge has been, it’s worth looking back to when it all kicked off.

Since April 2021 – two years before today’s Office for National Statistics numbers – prices have climbed nearly a fifth, according to calculations by Rachelle Earwaker, a senior economist at the think tank the Joseph Rowntree Foundation.

For the most part, wages have trailed those price increases, meaning Apri’s inflation decline to 8.7 per cent “will offer little comfort to the millions of households struggling with the sky-high cost of living,” Earwaker noted.

Drilling down into the ONS’s latest batch of inflation data doesn’t make for pretty reading.

Yes, on the headline consumer price index measure, strain on household finances is easing. CPI is back to its lowest level since March 2022 when it was seven per cent.

That indicator has been pretty much cast aside by the Bank of England. Governor Andrew Bailey and his team of wonks are more focused on measures of underlying price pressures, or, core inflation.

That reading blindsided absolutely everyone. The City thought it held steady at 6.2 per cent in April. The Bank was near those estimates too.

Instead, it leapt to 6.8 per cent. Ouch.

Services inflation has also been top of mind for Britain’s central bankers. Again, that beat forecasts, hitting 6.9 per cent.

Food prices are up 19 per cent, weighing on the poorest, who spend a greater proportion of their monthly budget on basic needs.

This is the scenario the monetary policy committee – Threadneedle Street’s nine-strong group that set the UK’s official interest rates – are worried about.

Inflation in the UK and in advanced economies was initially lifted by a sudden spending splurge after pandemic restrictions collided with withered supply chains.

That was then turbocharged by Russia’s full-scale invasion of Ukraine jolting international energy markets.

As those higher energy bills squeezed families and businesses, incentives to demand higher wages and hike prices amplified.

If each party competes without each other to protect their finances, a reinforcing inflation dynamic can break out that requires extremely tough measures from the Bank of England to tame it – IE, a return to steep interest rate increases.

The stickiness in core inflation suggests at least a fraction of that wage/price setting dynamic is gathering momentum.

Financial markets were pretty much unified in what Governor Bailey and co must do. They priced in an interest rate peak of 5.5 per cent just after the ONS’s stats were released at 7am.

Such an upward move would push the UK back to the brink of a recession. It’d crush homeowners rolling on to a new mortgage this year.

Everyone roundly slammed the International Monetary Fund earlier this week for being too gloomy on the UK after the lender of last resort ditched its recession forecast.

Well, with UK inflation still the second highest in western Europe – tied with Italy and behind Austria – it’s safe to say the country isn’t out of the woods yet.