Economic update: Records broken as prices rise

The phrase “highest since records began” has become common in the past month, in terms of economics as well as weather. Inflation continues to hit new heights, and this will have consequences for the public finances and for the UK’s economy.

This Insight looks at the economic news in June and discusses what this might mean for the UK in the weeks and months ahead.

Cost of living continues to rise

Consumer prices continued to accelerate, with the CPI inflation rate hitting a new high of 9.4% in June 2022. This was its highest rate since comparable records began in 1997 (and, according to modelled estimates, also likely the highest rate since around 1982).

The rise in inflation is outpacing almost all predictions. In March this year, the Office for Budget Responsibility (OBR) forecasted that CPI inflation would average 7.7% in April to June; it has actually been at least 9% in all three months. In June, the Bank of England sent a letter to the Chancellor, explaining the very high rates were largely due to global prices of energy and tradable goods, and (in the UK) “the tight labour market and the pricing strategies of firms”. A tight labour market means there are lots of job vacancies and few workers to fill them.

Although wages are rising on average, they are failing to keep pace with this very high level of inflation. In March to May 2022, average pay (excluding bonuses) fell by 2.8% compared to the previous year when adjusted for inflation; this was the fastest fall since comparable records began in 2000.

Source: ONS, Average weekly earnings in Great Britain: July 2022, 19 July 2022, figure 2

Effects on the Government’s debt interest payments

A quarter of UK government debt is linked to the Retail Prices Index (RPI) measure of inflation, which has also increased sharply along with the headline CPI rate. As a result, government debt interest payments in June 2022 came to £19.4 billion, once again the highest on record. The Institute for Fiscal Studies says that while this figure for June is “eye-wateringly high,” it is particularly “driven by short-term and seasonal effects.”

Debt interest payments are forecast to fall back to around £4 billion in July, but with inflation running higher than previously predicted, the OBR says higher than forecast payments “can be expected through the year.”

Source: ONS, time series NMFX, 21 July 2022

On 7 July, the OBR published its Fiscal risks and sustainability report. This warns that under current government policies, although debt will fall in the medium term, it is on an unsustainable path in the long term. The OBR projects that government debt could exceed 250% of GDP in 50 years or less, well above the current 96%. This is due to long-term pressures, such as an aging population, and the loss of motoring tax revenues as electric vehicles become widespread.

Such levels of debt would result in interest payments of about 9% of GDP, far above the roughly 2% that the UK has become accustomed to.

The economic outlook remains uncertain

Retail sales figures for June show that consumers are buying less as prices rise. Consumer confidence remains at historic lows, according to consumer industry analysts GfK. Overall sales volumes fell by 0.1% in June compared to May, and the fall would have been larger had it not been for an increase in food sales over the Platinum Jubilee bank holiday weekend.

Fuel sales were down by 4.3%, reflecting the largest monthly rise in petrol prices on record.

Source: Library calculations, based on ONS time series D7IO (20 July 2022) and JO5A (22 July 2022)

According to the Bank of England’s most recent financial stability report, global economic conditions have worsened (largely because of Russia’s invasion of Ukraine), and as a result the outlook for the UK economy is “very uncertain”. The report predicts that although the labour market will continue to be healthy in the short term, unemployment may start to rise in 2023.

The Bank’s Monetary Policy Committee’s next meeting will be on 4 August, and the Bank’s Governor Andrew Bailey has said that a 0.5 percentage point rise in interest rates is one of the options on the table to help lower inflation, even if this risks slowing growth. Bailey also said that although the most recent GDP growth figures looked relatively strong (the economy grew by 0.5% in May), this may be misleading because it doesn’t account for the different pattern in Bank Holidays this year as a result of the Jubilee.

Further reading

• Rising cost of living in the UK, Commons Library briefing
• The UK economy: a dashboard, Commons Library

About the author: Philip Brien is a researcher at the House of Commons Library, specialising in spending.

Photo: Inflation effect by Pormezz. Adobe Stock #id=514743076.