3 interesting things that happened in 2021 PART 3: INFLATION REACHES A 30 YEAR HIGH
This morning the Office for National Statistics (ONS) published inflation figures for December 2021 and the figures show that inflation reached the highest point in 30 years as it hits 5.4%. This is up from 5.1% in November.
Despite this multi-decade high, the big question for us all is how prolonged will inflation rise and how quickly it will then fall back?
The ONS also published separate data showing Brits have seen recent rises in their pay packets fall behind soaring inflation for the first time in more than a year.
LONGER-TERM INFLATIONARY PRESSURES – WHAT IS DRIVING UK INFLATION?
As well as the usual variables, from petrol prices to the impact of food costs, another key factor for inflation this year is what happens to global supply chains, which were hit hard by the pandemic. This has been seen most obviously in the car market, where a shortage of microchips slowed down the production of new cars, pushing the price of second-hand models up by 27%. However, a survey of purchasing managers at British manufacturers last showed an easing of prices paid for inputs from near-record highs.
Labour shortages are driving talent retention and recruitment and companies have responded to a post-Brexit, post-COVID shortage of workers by pushing up pay for some roles as they felt the need to reward staff and others were trying to attract and retain key skills.
Recent pay increases ranged between 2% and 3% but went as high as 14% in some cases, while 45% of firms had yet to agree on a pay deal as they awaited more clarity on inflation and other factors. But in real terms, British workers have seen their pay cut simultaneously trying to cope with rising prices.
ENERGY AND THE COST OF LIVING CRISIS HAVE ONLY JUST BEGUN – HOW LONG WILL INFLATION STAY HIGH?
The UK’s unemployment rate continued to fall in December 2021, with the latest data from the Office for National Statistics showing that the UK’s unemployment rate fell 0.4 percentage points to 4.1% on the quarter. The figures should be taken with a pinch of salt though as economic inactivity rose.
Pricing pressures will stay elevated until mid-2023. Food prices again grew strongly while increases in furniture and clothing also pushed up annual inflation. The cost of broadband is also due to go up.
Gas prices have fallen recently and Britain has a record number of liquefied natural gas cargoes coming to our shores this month will help to bring the gas price down from a peak of more than 450 pence in late December although it will still be much higher than 50 pence it was a year ago. The potential for war between Russia and the Ukraine will only increase the inflationary pressure.
HORIZON SCANNING – CRYSTAL BALL TIME: WHAT WILL HAPPEN IN 2022?
In December the BoE raised its estimate for the peak in inflation to about 6% in April. Given the gas price rises expected this year, households face a sharp increase of about 50% in their gas bills in April when a regulated price cap is due to be increased, I think that the BoE is likely to push up its full-year inflation forecasts again. It could be as high as 7% in April.
On Feb. 3 there is a strong chance that there will be another rise in Bank Rate to 0.5% hot on the heels of its December rise from 0.1% to 0.25%. There could be as many as three interest rate rises this year, which would represent a major shift towards a significantly tighter monetary policy.
The inflation peak will clearly hit the spending power of consumers just as they face a tax hike in April. Disposable income will fall in real terms this year, contributing to a slowdown in economic growth to 3.7% in 2022. The BoE in November predicted 5.0% growth this year.
