UK inflation spikes at record rate in August

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

Some of the uplift reflected coronavirus relief programs that were in place last summer, such as sales tax reductions in the hospitality sector and the government’s “Eat Out to Help Out” initiative, which heavily discounted restaurant meals.

But the UK economy has also been facing sustained upward pressure on prices driven by worker shortages and snarled supply chains linked to the pandemic and Brexit. That is weighing on the economic recovery and could force the Bank of England to bring interest rate hikes forward if inflation remains above its 2% target for longer than expected.

There were a record 1 million UK job vacancies in June to August and wages soared nearly 7% between May and July, according to the ONS. Rising wages come as companies are already contending with higher costs in their supply chains from raw materials shortages and soaring shipping rates.

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

A ‘whiff’ of stagflation

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

If prices continue rising, there is a risk that stagflation occurs, according to Berenberg senior economist Kallum Pickering, a phenomenon characterized by stubbornly high inflation and weak economic growth.

“The recent batch of UK data showing record labor demand and surging wages, rising inflation but weaker-than-expected real GDP growth has a whiff of stagflation to it,” Pickering said in a research note on Wednesday. “While the risk of such an outcome remains low, in our view, it puts the [Bank of England] in a tricky position nonetheless,” he added.

The unexpectedly sharp increase in inflation could force the Bank of England to hike interest rates sooner than anticipated, Pickering said.

The spike in UK inflation follows data out Tuesday showing that the rate of inflation in the United States slowed slightly in August as some price distortions eased, such as for used cars. But prices remain elevated across the economy amid persistent supply chain bottlenecks.

“There are too many reasons to expect supply shocks in other areas to be confident inflation isn’t going to settle at [a] slightly uncomfortable level for a sustained period,” Societe Generale strategist Kit Juckes said in a note on Wednesday.