Grinding to a Halt

Inflation in the UK has hit a 40 year high of 9%. Read below for more.


The news that domestic inflation had reached 9% and was expected to reach double figures later this year hardly came as a surprise. Indeed, if you take the Retail Price Index, which used to be the main measure of the change in the cost of living, it is already there. Coming in at over 11%, the RPI was fully 2% over the Consumer Price Index, which is now the government’s preferred benchmark.

Inflation is indeed grabbing all the headlines at present, with the Bank of England’s Governor, Andrew Bailey, telling MPs we are facing an apocalyptic rise in food prices. Yet despite all this, our stock market has remained remarkably calm. While some markets around the world are in bear territory or at least have suffered a serious correction, here in the UK we seem to be weathering the storm relatively well.

While this is due in part to the fact that we have less exposure to technology shares, which have been at the core of the correction seen in the United States, how long this state of affairs can persist is hard to judge. Recent unemployment figures disclosed a jobless total lower than at any time for nearly half a century and the number of vacancies now exceeds the number of people out of work. The expectation must now be for the Bank to raise interest rates more aggressively than previously expected, which could impact on investor sentiment.

At one stage it looked as though this tight labour market might actually help the pound, though the rally that took place in anticipation of higher interest rates was relatively short lived. A stronger pound would help mitigate the effect of the rising cost of imported goods, but dearer money adds to the pressure being felt by households as they battle with higher energy, fuel and food prices. Already there are signs that the boom in residential property values is tailing off. And these latest labour market figures show that wages are rising less swiftly than inflation.

This, of course, raises the spectre of wage inflation taking off. It could be that a slowdown in economic activity will discourage excessive wage demands, but even that would not be a comfortable scenario as we could find ourselves with stagflation – the combination of a stagnant economy with a rapidly rising cost of living. Given all the other pressures, this may be unavoidable, but if it arrives we must hope it does not persist for too long. In the meantime, the outlook remains uncertain.

Brian Tora

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