Inflation fever: UK's highest in 40 years, recession unavoidable
The UK is witnessing its highest inflation surge of 10% for the first time in 40 years, mounting more pressure on the Bank of England and causing further drops in wages but rapid rises in prices.
Global inflation is soaring, with the UK's accelerating at the fastest pace in 40 years in July, reaching double-digits and adding more pressure on the Bank of England.
Last month, the consumer price index boosted up 10.1% on an annual basis, surpassing the FXStreet-cited market consensus of 9.8% and speeding up from 9.4% in June.
The last time inflation was this extreme was in 1982 - 40 years ago.
A long deep recession closer than expected
A year prior, the inflation rate was at 2.0% - matching the Bank of England's target. Nevertheless, there has been a rapid increase in annual inflation every month since last October, and per month, consumer prices jumped 0.6% in July, slowing from a growth of 0.8% recorded in June. Regardless, this had been expected by analysts to slow even further to 0.4%.
UK wages dropped 3.0% year-on-year in the three months leading to June, according to the Office for National Statistics (ONS), adding that July's alarming inflation figure is likely to make that pay squeeze even tighter. Hundreds of thousands of businesses are functioning with razor-thin profit margins and are aware that their consumers are tightening their budgets, limiting their ability to pay greater wages. Rather than raising prices, these companies are likely to lower output or service levels.
The latest inflation readings also put the Bank of England (BoE) under the spotlight again. The BoE lifted rates by 50 basis points in August which mirrors aggressive monetary policy from the US Federal Reserve and the European Central Bank, as the world struggles to tame the worrying inflation that has been fuelled by the war in Ukraine.
Meanwhile, annual factory gate inflation slowed and production-input prices jumped 23% yearly in July, easing from June's record high of 24%.
The ONS also projected that the country would enter a recession that would last until late 2023.
Christopher Dembik, head of macro analysis at Saxo Bank, commented: “The recession will be long and deep. There won’t be an easy escape. This is most worrying, in our view. The Bank of England assesses the slump will last with GDP still 1.75% below today’s levels in mid-2025.”