The governor of the Bank of England today warned inflation could stay higher for longer than expected after it hit a 30-year high of 5.4% – as he ruled out interest rates returning to levels seen before the financial crash.
Andrew Bailey told MPs the Bank would do what it could to ease the strain on households, but he said a number of factors suggested ‘inflationary pressures’ could continue for some time.
The financial markets expect that energy prices will take longer than they did a few months back, which could lead to further price pressures. He also said that increased tensions between Russia and Ukraine were another problem.
He stated that ‘that is a great concern’ to MPs. I find it concerning to think of the interplay between these transitory and secondary effects, as they can prolong this process.
In a speech to Parliament’s Treasury Committee Bailey, Mr Bailey explained that low interest rates were largely due to structural reasons. These included the necessity for increased investment in order to address the growing demands of the population as well as to combat low productivity.
According to Mr Bailey, the Bank was of the opinion that there was no change in this “structural story”.
He stated, “So, when people tell me that we could return to the prefinancial crisis times I would be against it.” “That does not mean that interest rates are going to rise. But it is to consider how much.
On the day of the financial crisis, interest rates were at 5.5%. They then plummeted as the Bank attempted to stimulate businesses to spend again.
British Consumer Price Index inflation is at 5.4%, up from 5.1% in November. This puts additional pressure on already tight households.
The current BoE base interest rate is currently just 0.25%. Capital Economics predicts it could rise to 1.54%, according to research.
Andrew Bailey claimed that low interest rates are due to structural reasons in the UK as well as around the world.
Now, inflation has reached historic heights. Image: Graph showing the inflation rate from 1992 to the present date. Based on ONS data
UK Interest Rates: They were at 5.5% before the financial crisis, but they have fallen to new records.
On-line graph showing the Consumer Prices Index with owner occupiers housing costs (CPIH), Consumer Prices Index (CPI), as well as the owner occupiers housing costs component (OOH).
The rising cost of gas and electricity is putting pressure on household finances. In addition, supply chain problems and major increases in electric tariffs are threatening the economy.
Pensioners will be particularly hard hit, with the scrapping of the triple lock meaning a planned 8.3 per cent increase will now only be a 3.1 per cent boost, just as the cost of essential goods surges more than 6 per cent.
Separate data released yesterday indicated that wages growth in November 2021 was less than inflation for the first year since July 2020.
New official figures showed house prices by £25,000 last year and continued to climb even after the end of the stamp duty holiday.
Meanwhile, the cost of £200,000 mortgage could rise by £1,200 a year if interest rates rise to one per cent.
In the wake of recent inflation statistics, Unions have intensified their efforts to get raises for members.
According to the ONS, the prices of products produced in UK factories rose 9.3 percent in December. This is slightly lower than the 9.4 percentage increase in November.
The cost of raw materials and petroleum used by manufacturers increased 13.5 percent in the 12 months to December, which is down from November’s 15.2 percentage growth.
There were many goods and services that contributed to the inflation increase. The biggest effect was on food and drinks, then hotels, restaurants and furniture.
This figure of 5.4 percent was higher than the previous March 1992 level, which was at 7.1%. This puts pressure on Bank of England to increase interest rates next month.
Last month, The Bank was the first major central bank worldwide to raise interest rates by 0.1% to 0.25 % since the beginning of the pandemic.
The move, which was an attempt to try to cool the rampant inflation rate, came a day after data showed CPI had unexpectedly surged to a 10-year high in November.
Boris Johnson faces pressure from politicians to reverse an April 50 percent rise in energy prices for households.
Rishi Sunak today responded to CPI inflation rising. “I fully understand the stress people face with living costs and will listen to their concerns, just as we did throughout the pandemic.”
‘We’re providing support worth around £12billion this financial year and next to help families with the cost of living.
“We will reduce the Universal Credit taper to guarantee work pays. To keep costs down we are freezing fuel duty and alcohol duties and offering targeted support for households struggling with energy bills.
CPI is expected to reach a 30 year high at around 6.6% in April, according to The Bank. This will be due to higher energy costs. It will then take CPI more than 2 years to get back to its target of 2.2%.
The ONS data revealed that December’s inflation rate rose due to rising food costs and higher prices for clothing and furniture. The following graph illustrates the CPIH’s 12-month inflation rate.
CPIH Annual Inflation Rate Changes: The biggest contribution was made by food and drinks
Financial markets see a high chance that the Bank of England will raise rates again on February 3 and announce that it will allow its £875billion stock of government bonds to fall as the gilts begin to mature.
Armed Forces minister James Heappey said the Government is looking at what more can be done to help households with the cost of living crisis.
BBC Breakfast: He stated that rising inflation is a serious concern and added, “The government is considering what additional actions could be taken.”
“I don’t think viewers learn anything this morning, because they have already seen their bills increase over the past few months.
“But, it’s a headline which reminds us all at Government that millions of people are worried about how they can heat their homes and feed their families.
“That’s why both the Chancellor and Business Secretary as well as the Prime Minister look into what they can and should do to assist them.”
Jonathan Reynolds, Shadow Business Secretary to BBC Radio 4 this morning said that the ‘triple wommy’ faced by families is Jonathan Reynolds.
“Inflation is affecting real wages, incomes and pensioners,” he said. Significant tax rises have occurred. There have been huge increases in your energy bills.
It is our duty to make the Government accountable. And that’s exactly what we’re doing.
“Again, that’s in a positive contrast with a government which seems unable to defend itself.
Unseasonal increases of 0.7% were also evident in the data for footwear and clothing prices
CPIH’s contribution to housing and household services was its highest level since 2009.
Grant Fitzner is the chief economist of the ONS. He stated today that the inflation rate rose at the end and was not higher in nearly 30 years.
The 1992 Black Wednesday event and the 15% interest rate:
December 2021 saw a Consumer Prices Index rate of 5.4%. It was the highest since March 1992 at 7.1%.
This was the period that followed 1991’s UK recession. It was caused by high interest rates and plummeting property prices.
Norman Lamont, Chancellor of the United Kingdom, speaks out about Britain’s exit from the Exchange Rate Mechanism in Black Wednesday 1992
Black Wednesday was September 16, 1992. The UK exited the Exchange Rate Mechanism, (ERM). On that day the pound fell by 20%.
It followed the end of the economic boom in late 1980s, which led to huge economic growth. There was also a significant increase in property prices. This coincided with a period of great consumer confidence.
In September 1996 the government increased interest rates as much as 15%
With the goal of controlling inflation, the government joined the ERM 1990. But then the economy started to slow down. The pound began losing its value against the Deutsche Mark.
The Government bought sterling with foreign currency reserves in order to keep its value high. It also increased interest rates up to 15%, but it was not sustainable and the government had to exit the EMR to devalue the currency.
The reason for a decline in home prices is that many could not afford to make the mortgage payments. Consumer confidence fell and so did household wealth.
In 1992, unemployment was at over 10%. House prices fell by 10% in 1990 due to rising home repossession rates.
The annual inflation rate was also higher due to an increase in furniture and clothing prices.
These large increases were partially offset by the rise in petrol prices. They were at their highest levels this month but were still stable, however, they rose last year.
“The economy’s closures last year had an impact on some items, but overall this has negligible effect on the inflation rate.
Core CPI, which does not include volatile food, energy or tobacco prices, rose to record levels of 4.2 percent in December, compared with November’s 3.9%.
Retail price inflation, an older measurement that the ONS states is not accurate but is still used widely by government and business, rose to 7.5% from November’s record of 7.1%.
Today, the British Chambers of Commerce warned that inflation would continue to rise in the future and could exceed 6 percent by April.
Suren Thiru (head of economics, BCC) stated that this morning, “Higher inflation is contributing to the unprecedented increase in costs faced businesses.”
“The combined effect of rising energy prices, increased input costs, and the looming National Insurance increase means firms feel more under pressure to raise their prices.
“Inflation will rise in the next months due to rising energy prices, higher raw material costs, and reversed VAT reductions for hotels. It is expected that it will reach 6 percent by April.
In addition, she stated that the rising inflation may lead to a February interest-rate rise. But raising rates too aggressively risked undermining confidence. It will not do much to lower the inflationary trend.
According to ONS, December saw a 4.2 percent increase in food and drinks prices year over year. It is the highest rise since September 2013.
The average price of clothing in shops goes up by 4.2 percent.
The biggest impact on consumer wallets is the increase in energy bills following the Oct price cap hike. Experts are warning of an upwards of 50 percent in these prices when the next revision takes place in April.
The ONS reported that motorists are also experiencing painful increases in fuel prices. It said the average petrol price remained at an all-time high of 145.8 pence per litre, up from 114.1 pence per litre one year ago.
According to the ONS, rising used car prices are another reason for the rise in CPI since 2020.
CPIH (which includes homeowner-occupier housing costs) was at 4.8% in December, compared to 4.6% in November, and it is now the highest level since September 2008.
Pantheon Macroeconomics’ Samuel Tombs stated that December’s inflation figures left the Bank of England with “little choice” but to raise rates once again in February.
According to him, CPI will likely reach a peak of’slightly more than’ 6 percent in April.
Boris Johnson yesterday during his visit to North London’s Finchley Memorial Hospital
Last October’s photograph shows Rishi Sunak as Chancellor. He said that he understood the difficulties people face with rising living costs.
He said, “Nevertheless, we expect CPI inflation will fall back quickly after April, and eventually to undershoot (Bank)’s 2) 2 percent target in 2023.”
The latest figures show that property prices increased by 10% annually from November 2021 to December 2021.
The price of houses rose by just 9.8% in October. This was a slight increase from the previous month.
The average house price was £271,000 in November 2021, which is £25,000 higher than the same time last year.
These figures show that prices for houses continued to rise even though the September 2021 stamp duty holiday was over.
The tax break, which lowered home buyers’ bills by up to £15,000, contributed to rapidly rising prices after it was introduced in July 2020.
This was despite the cost of a home increasing by £10,000 more than the maximum tax break.
However, current homeowners face difficulties in meeting mortgage repayments due to steep increases.
The Bank of England raised the base rate last month from 0.1% to 0.25 percent, a new record, to curb inflation. Additional increases are anticipated in 2022.
However, any rise in the base rates means that mortgage payments become more difficult for millions of people who have tracker or variable rate mortgages.
Figures from broker L&C Mortgages show that if the base rate rose to 1 per cent, a household with a £200,000 mortgage would need to shell out an extra £1,200 per year compared with before the pandemic.
A lot of households may not be able pay the mortgage payments.
Inflation-ravaged Britain: Hotel floors are closed and bars shut down to meet rising costs. Independent shops and independent shops have warned they cannot compete with the online giants. Factory doors are closing and supermarkets say food will become more expensive.
Rory Tingle, MailOnline’s Home Affairs Correspondent
Many businesses have spoken out about the dire consequences of rising inflation. Hotels were forced to close their floors in order to cut down on energy costs, while shops had to rely on their survival instincts. A supermarket boss warned of more food price increases.
According to ONS data, the rate of inflation for Consumer Price Index in Britain rose more than anticipated to 5.4% – it was its highest level in over 30 years.
This was up from 5.1 per cent in November, and is the highest since 1992 as the cost of living squeeze continues.
Sadie Shard, who runs the Crescent Hotel in Scarborough, said she had gone from paying £2,000 a month to energy to £10,000.
“We have closed the bar quite a bit of times per week, because it isn’t enough to pay our energy bills. We’ve also been closing some floors when we are not occupied, so we don’t waste any gas,” she said on BBC Radio 4’s Today program.
We have no option but to increase prices. Hotels drop their winter prices, but that’s not possible.
Barry Whitehouse is owner of The Artery, a Banbury-based shop that sells art. He said, “It’s the perfect storm to help small businesses.”
Adam Bamford is the co-founder and CEO of Derby-based Colleague Box, a corporate gift supplier. He stated that while he hates raising prices, “the truth is we have no other choice.”
Richard Walker is Iceland’s managing Director. He stated: “The number this morning at 5.4% will most likely increase further.
“We’ve been talking for some time about inflation impacting food prices because it occurs throughout the supply chains: all from commodity prices to labour shortages and shipping costs.
“Business isn’t an endless sponge that absorbs these costs forever so we’ll be able to see the results on the shelves.” This is the perfect storm to our customers.
Luke Johnson, an entrepreneur, stated that rising energy prices are making manufacturing firms particularly vulnerable.
MailOnline was informed by him that he is facing an increase of 40% in electricity costs at a manufacturing company he works for.
The UK’s green taxes are a significant cost-burden and make it less attractive to do business.
Dawn Hopkins, owner of the Rose Inn in Norwich and vice chair of the Campaign for Pubs, said: ‘I put my prices up late last year and it’s going to be something I’m going to have to consider again this year’
Sadie Shard, who runs the Crescent Hotel in Scarborough, (pictured) said she had gone from paying £2,000 a month to energy to £10,000
MailOnline also heard from other owners of businesses that their prices had to go up repeatedly.
Barry Whitehouse of The Artery in Banbury said that it was the ideal storm for small business.
“We have been receiving warning letters from nearly all suppliers about impending price rises due to rising raw material costs. We are now being passed on by them and we are forced to share with our customers.
“Small margins and low buying power will increase the distance between online giants, who often have the ability to purchase larger quantities without the price rises.
Richard Walker, Iceland’s managing director (seen in July with Prince Charles), stated: “The number this morning at 5.4% will likely increase further.”
Adam Bamford was co-founder Colleague Box in Derby, which sells corporate gifts.
“Our suppliers are forced to pay higher for every aspect of production, which leads to daily email of price rises that place even more strain on our company.
“We don’t talk anymore about profits, as it’s more of a fight for survival than to make money.
Wilfred Emmanuel-Jones, 64, who runs the popular Black Farmer food range, said: ‘A lot of our products have been hit by inflation, especially chicken, which is up by between seven and ten per cent.
“There is a perfect storm at the moment. Many of those Eastern Europeans allowed to remain with their temporary visas expired after Christmas are now back home. Transport costs, energy and fuel bills have risen, as well as the threat from the avian influenza.
“We now have to contact all retailers and ask them for an increase in price, but they’re very resistant as they’re engaged in price wars with one another.
The UK has some of the best food standards anywhere in the world. We are also very strict about our regulations, so there is a risk that cheap imports could be coming into the country.
Wilfred Jones, 64 years old, runs Black Farmer’s food product line.
‘A lot more cheap chicken is flown from Thailand or Poland. People would be horrified to learn what kind of conditions they were kept in.
“The British consumer is given a wide range of choices. They can choose to pay more for high quality products or less, and quality will be affected.
Dawn Hopkins, the Rose Inn owner in Norwich and Vice Chair of Campaign for Pubs said, “Like everyone else, we have seen huge rises in our utilities and breweries. And then, when you combine that with the impact on our customers, then it is worrying about the future.
“I set my prices high last year, and this is something that I will have to reconsider.”