Economy On A Knife Edge As Inflation Keeps Climbing

Commenting on the Office for National Statistics inflation figures for May 2022, Head of Research at the BCC, David Bharier, said:  

“The further increase in Consumer Prices Index inflation to 9.1% underscores the severe pressure that businesses and households are under.

“In early 2021, firms were already flagging huge spikes in raw material and shipping container costs as the world economy began re-opening.

“Since then, global factors have continued to drive up commodity costs, and more and more sectors have been impacted.

“Our own measures tracking firms’ price expectations are currently far beyond anything we've seen since our records began in 1989. In Q1 2022, 62% of businesses expected to increase their prices over the next three months, rising to 75% for retailers and wholesalers.

“This has been borne out in today’s figures, with food and non-alcoholic beverages making the largest upward contribution to the CPI. Further increases to essential items could have a knock-on effect for consumer demand in other areas.

“Inflation is set to continue upwards, with a further rise in the energy price cap yet to come, leaving businesses with mounting economic uncertainty, alongside labour shortages. One immediate measure to reduce the pressure on firms would be to cut VAT on business energy bills to 5%.

“This inflationary surge sits alongside a poor economic outlook and unless the Government acts with urgency to encourage businesses to invest, the chances of a recession will only increase."

Anna Leach, CBI Deputy Chief Economist, said:

“Inflation has picked up again, and we expect it to stay elevated over the year ahead, particularly as global price pressures remain strong. The result will be much pain for those businesses most exposed to higher costs, and a historic squeeze on households’ incomes.

“The void left by falling household spending must be filled by government action to shore up both near and long-term economic growth. Committing to a permanent successor to the super-deduction, as well as supporting green infrastructure and technologies that help cut energy bills in homes and businesses, will both boost economic confidence and reduce exposure to volatile global energy prices.”

Julian Jessop, Economics Fellow at free market think tank the Institute of Economic Affairs, said:

"May’s consumer price data contained something for everyone. The bad news is that the headline CPI measure hit a new 40-year high of 9.1 per cent, led by the continued surge in food prices. The latest Kantar survey suggests that grocery price inflation rose further in June.

"Nonetheless, May’s inflation rate was at least at the lower end of expectations. Some had feared a much bigger increase from April’s 9.0 per cent, after a bigger jump in the US. The numbers were therefore bad, but could have been a lot worse.

"‘Core’ inflation excluding food and energy also fell back, from 6.2 per cent to 5.9 per cent. This will not be much comfort for those struggling to eat, or heat their homes. But it may reassure the Bank of England, which is worried about more persistent inflationary pressures.

"There are some good reasons to think that overall inflation will peak sooner, and at a lower level, than many expect. On the demand side, the global economy has slowed sharply. On the supply side, business surveys and commodity markets are showing the first tentative signs that pipeline pressures are easing.

"Above all, central banks are finally starting to catch up with the surge in inflation. Interest rates are returning towards more sensible levels, and monetary growth is cooling.

"Despite this, there is no room for complacency. It is already being suggested that today’s inflation data are low enough to allow the Bank of England to raise rates by just another quarter point again at the next MPC meeting in August, rather than up the pace.

"However, the current level of official interest rates – just 1.25 per cent - is still far too low. A continued drip, drip of small increases from here is unlikely to change anything. A half-point move would at least send a clearer signal that the Bank is serious about getting inflation back down again."