UK on course for 'deepest living standards squeeze for 60 years'

ITV News Business and Economics Editor Joel Hills sets out how "rampant" inflation will affect households

The January clothing sales are a much-anticipated event.

This year was a washout. Bargain hunters were left frustrated, with discounts the weakest the UK has seen since 1990.

Consumer price inflation accelerated to the highest rate in 30 years in January, powered by higher clothing and footwear prices.

The annual headline rate hit 5.5%. Yet again, that’s higher than the Bank of England had forecast. It was, admittedly, a small miss but the Bank has consistently under-estimated the upward pressure on prices in recent months and that matters.

It is, after all, the Bank’s job to keep inflation on a short leash.

Inflation currently looks rampant. The result is a tighter squeeze on our living standards and greater pressure on the Bank to raise interest rates to peg inflation back to its 2% target.The expectation remains that this bout of high inflation will prove temporary - for what it is worth, the Bank believes inflation will peak at around 7% in April.

But the worst is yet to come.

Energy bills will rise again in April when the new OFGEM price cap is raised by 54%; in the same month the VAT rate for hospitality and tourism companies increases from 12.5% to 20%; the market price of oil has been increasing since the beginning of the year; and producer price inflation for manufacturers is still running hot at 13.6%.

As it stands, pay growth is being outpaced by price growth. “Real” incomes (adjusted for inflation) are falling and that will feel brutal for many households.

The Resolution Foundation calculates that the UK faces the “deepest squeeze on living standards in six decades”.

The Bank of England’s great concern is that high inflation feeds through into demands for higher wages which risks another round of price increases.

The Bank’s view is that we are being hit by an economic shock that - bluntly - we have to take on the chin. If we hold our nerve, this should all pass within a year or so and there won’t be the need for significant interest rate rises.

The unions have other ideas.

“Soaring inflation is not the fault of the workers,” argues UNITE’s General Secretary, Sharon Graham: “This is yet another crisis not of their making so why should workers be made to pay for it”.

UNITE is agitating for pay settlements based on RPI - a different measure of inflation - which it says better represents the price rises its members are experiencing. RPI hit 7.8% in January.

As for interest rates, the markets have another rise fully priced in next month.

Bank Rate sits at 0.5%, investors believe that it will have cleared 2% by this time next year. An increase in the cost of borrowing has implications for households and the housing market.

Annual house price inflation reached 10.8% in December. It won’t be there for long.