Inflation still set to climb this winter, putting more pressure on living standards

Higher inflation is not going away just yet. If policymakers hoped that new data would avoid a tough call on an interest rate rise as soon as next month, they will be disappointed.

Prices grew by 3.1 per cent in the 12 months to September — only a slightly weaker reading from the same period to August, even with the Eat Out to Help Out scheme distorting the picture. The policy caused a sudden fall in prices for food and drink, and then rise once the discount ended.

Estimates that inflation might climb above four per cent still stand. That means a difficult decision for the Bank of England. Its policymakers risk weakening growth with a hike or letting price rises eat into living standards by failing to curb inflation.

Those who back a rise “will be able to continue to warn of the dangers that high inflation poses to inflation expectations”, while those against can “point out that the above-target rate is primarily due to rising prices for oil and some goods affected by global supply chain problems,” says Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

But the buzz about inflation is such that it is about more than just the data on price growth. The governor of the Bank of England, Andrew Bailey, has noted that he’s watching inflation expectations closely too. The Bank needs to try to avoid shocking consumers or those placing bets in financial markets.

The government cannot ignore the problem of climbing prices, either.

“The big questions for policymakers now are just how temporary these price pressures will be, and whether they’ll translate into stronger pay growth,” says Jack Leslie, senior economist at the Resolution Foundation. “Britain’s recent history suggests that high inflation feeds through into real wage falls instead – a lesson families can ill-afford to learn for a third time in a decade.”

With the cut in Universal Credit payments of £20 per week starting to bite (the ending of an uplift the government said was a temporary measure during Covid-19 restrictions), higher prices are a testing political issue.

The chancellor was quick to respond to the data, along with the business secretary, Kwasi Kwarteng. For the Treasury, the emphasis was on global pressures arising from supply chain disruption triggered by the pandemic.

Kwarteng, meanwhile, suggested that inflation will be limited, telling the BBC that he was “confident that it’ll be contained” but added that “we’ll have to wait and see”.

The suggestion that it will be “contained” is a signal of the kind of pressure the cost-of-living crunch is placing on the Bank of England.

That pressure is only going to build. The large rise in energy bills has yet to be fully factored in.

“The 12 per cent rise in utility prices on 1 October will probably increase inflation to around 3.8 per cent in October,” according to Paul Dales, chief UK economist at Capital Economics. Dales believes inflation could increase to around 5 per cent in April next year and the Bank of England expects it to rise above 4 per cent by the end of the year, potentially above what the Office for National Statistics believes is the real rate of wage growth.

The Bank is concerned that “higher inflation will become embedded in the system”, in part due to expectations for higher wages and prices going forward. “That’s why it will become much keener to raise interest rates,” Dales says.

That’s not a slam-dunk for households, however. Many may face higher debt repayments as a result of an interest rate rise. And the Treasury’s £500m support fund to help vulnerable households this winter might not be enough to bridge that gap in the face of higher bills. If price growth continues and wages fail to keep pace, it could prove a drop in the ocean.