The heat has been turned down slightly on the bubbling cauldron of prices – inflation came in at 10.1% in March, down from 10.4% in February. But instead of retreating below double digits, the consumer price index measure of inflation is staying stubbornly high.
With inflation still scalding and causing more pain for companies and consumers, interest rates now look set to be pushed up again to try and cool it down rapidly.
Why is inflation still so high?
Although energy costs continue to fall, there’s been a relentless rise in food and non-alcoholic beverages. They soared by just over 19% in price in the year to March, up from around 18% in February.
Food prices haven’t risen this quickly over a year since August 1977, when the Queen was celebrating the silver jubilee and not long before a smaller one-pound note began to circulate.
The pound feels a lot smaller in our pockets right now as inflation continues to devour spending power, with wages rising so much more slowly.
What could this mean for interest rates going forward?
Core inflation, which strips out volatile energy and food prices, is still the main worry as it’s remained so sticky at 6.2%. Policymakers have also been worried that labour shortages have been pushing up wages, adding fuel to the inflation fire. This has been particularly concerning in the private sector because it risks feeding through to even higher prices. But there are signs that the tight jobs market is easing, which should help.
However, this likely won’t be enough to stop further rate hikes. We’re now even more likely to see another interest rate rise of 0.25% from the Bank of England in May.
What about unemployment and the economy?
Vacancies fell for the ninth consecutive month, while the unemployment rate rose to 3.8% from 3.7% in March. But the numbers don’t make for great reading for workers, who are still losing out as pay growth still falls way short of inflation.
However, they might not have to wait too much longer for some rays of light to finally appear. There are expectations that wage increases could start to outpace inflation from the summer onwards, as the effects of last year’s high energy prices drop out of the figures. But if food prices stay stubborn, inflation could take longer to come down.
Although expectations of a recession have receded, the overall picture of the UK economy is one of stagnation, with no growth registered in the economy in February. Construction grew thanks to repair works taking place. There were also pockets of retail resilience which helped consumer-facing services output grow by 0.4%. But it wasn’t enough to offset sharp falls elsewhere as teachers and civil servants walked out.
There are signs that uncertainty about what lies ahead for the UK means more companies are adopting a brace position, and putting recruitment plans on ice. This doesn’t bode well for growth as expansion plans seem to be taking a backseat, just at a time when the economy needs an added thrust to drag it out of stagnation.
This article isn’t personal advice. If you’re not sure whether something’s right for you, ask for financial advice.