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Britain’s Inflation Rate Soars to a 40-Year High 

Consumer prices increased by 9% year on year through April, the fastest rate since March 1982, according to the Office for National Statistics in a report released on Wednesday. 

Inflation in the United Kingdom has reached its highest level since Margaret Thatcher was prime minister 40 years ago, increasing pressure on the government and central bank to act. 

The increase is more than double the rate of basic wage growth, putting downward pressure on consumer spending power. The pain is only going to get worse, with the Bank of England predicting double-digit inflation by October, when energy prices are almost certain to rise again.

The increase in energy prices, which reflected a surge in wholesale markets, drove a 54 percent increase in consumer bills in April, up from 7% in March. Fuel prices also played a role, reflecting higher oil prices following the Ukraine war. In April, both gasoline and diesel prices reached new highs. 

Food and non-alcoholic beverage prices increased by 6.7 percent, indicating more widespread inflation. The cost of recreation and culture increased 5.9 percent, the most since at least 2006, while restaurant and hotel prices increased 8 percent. Part of this was due to the return of VAT to its normal rate following the pandemic. Furniture and household goods increased 10.7 percent.

Economists had predicted a reading of 9.1%. Traders reduced money market bets on interest rate hikes by the Bank of England, and the pound extended losses against the dollar, falling as much as 0.9 percent to $1.2387. 

The rise in inflation highlights the difficult balancing act confronting the UK central bank, which is raising interest rates to control inflation while the risk of recession rises. With the government raising taxes, Sunak is under even more pressure to propose measures to assist more people. 

Price pressures are not abating. Factory gate prices increased by 14% in April, up from 11.9 percent in March, reaching their highest level since 2008.

Commodity input prices rose at the fastest rate since records began, rising 18.6 percent. Producer prices are an important indicator of where prices will go on the high street because they reveal the higher costs that businesses face and are likely to pass on. 

The retail price index, which includes housing costs, increased to 11.1 percent, the highest level since 1982. This will strain the public purse, as it is linked to roughly a quarter of the government’s debt. The interest bill is expected to double to £80 billion this year, and inflation is outperforming forecasts.

Despite the lowest unemployment in nearly 50 years, British consumers are now facing one of the worst periods for living standards on record, with around 250,000 more households facing destitution. According to Bloomberg Economics, inflation will add nearly £2,400 pounds ($2,990) to the average household’s bills this year. 

“With the energy price cap increase, inflation was always going to hit hard in April,” Rain Newton-Smith, chief economist for the CBI, Britain’s largest business lobby group, said. “Inflation is likely to remain high in the near future.” It is critical that the government investigates options for assisting people in real need.” 

What began as a supply-driven energy price shock is now affecting prices throughout the economy.

The BOE is concerned that a wage price spiral will emerge, with companies raising prices to protect their profit margins in response to demands for higher pay to keep up with inflation. 

With economists now predicting a 40% chance of a recession, forecasters disagree on how far policymakers will raise interest rates. 

The Bank of England raised the benchmark rate for the fourth time this month, bringing it to 1%, and money markets are pricing in 2.5 percent within a year. However, economists expect only two more 25 basis-point increases this summer before policy is paused.

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