UK inflation hits record high in August

The annual inflation rate rose 3.2% in August, up from 2% in the 12-month period to July, the UK’s Office for National Statistics (ONS) said on Wednesday. The monthly increase is the largest recorded since the ONS began keeping records in January 1997.

Part of the increase reflected coronavirus relief programs that were in place last summer, such as hotel sales tax cuts and the government’s “Eat Out to Help Out” initiative. », Which has sharply reduced restaurant meals.

But the UK economy has also faced sustained upward pressure on prices from labor shortages and booming supply chains linked to the pandemic and Brexit. This is weighing on the economic recovery and could force the Bank of England to raise interest rates if inflation stays above its 2% target for longer than expected.

There was a record one million job vacancies in the UK from June to August and wages climbed nearly 7% between May and July, according to the ONS. The wage hike comes as companies already face higher costs in their supply chains due to raw material shortages and skyrocketing shipping prices.

Supply chain disruptions and labor shortages are hampering Britain’s economic recovery. GDP growth slowed sharply in July, posting its smallest monthly increase since February, the ONS announced last week.

A “puff” of stagflation

Economy remains 2.1% smaller than before the pandemic and economists in Berenberg now expect it to make a full recovery in the second quarter of 2022 instead of the first.

If prices continue to rise, there is a risk of stagflation, according to Berenberg senior economist Kallum Pickering, a phenomenon characterized by stubbornly high inflation and low economic growth.

“The recent batch of UK data showing record labor demand and rising wages, rising inflation but weaker than expected real GDP growth smacks of stagflation,” Pickering said in a note. research Wednesday. “Although the risk of such an outcome remains low, in our opinion, it puts the [Bank of England] in a delicate position, “he added.

The unexpected rise in inflation could force the Bank of England to raise interest rates sooner than expected, Pickering said.

The UK inflation spike follows data released Tuesday showing the US inflation rate eased slightly in August as some price distortions eased, as with used cars. But prices remain high throughout the economy amid persistent supply chain bottlenecks.

“There are too many reasons to expect supply shocks in other areas to be convinced that inflation is not going to settle at [a] slightly uncomfortable level for an extended period, ”Societe Generale strategist Kit Juckes said in a note Wednesday.