U.K. CPI hits 11.1% as energy, food price rises pummel consumers

By Geoffrey Smith 

Investing.com -- Inflation in the U.K. leaped to a new multi-decade high in October as rising prices for food and energy kept up the relentless pressure on consumers' disposable incomes.

The Office for National Statistics said the consumer price index rose by 2.0% from September alone, and was up 11.1% from a year earlier, despite efforts by the government to limit the rise in regulated household energy bills. Economists had forecast a monthly gain of 1.7% and an annual rate of 10.7%. 

The figures make dismal reading for the U.K. government too, given that it will add billions more to the cost of servicing its debt, a quarter of which is directly linked to the annual inflation rate. The government is due to announce new tax and spending plans for the coming years on Thursday, and will have to incorporate the latest surge in inflation into its planning.

"This insidious tax is eating into pay checks, household budgets and savings, while thwarting any chance of long-term economic growth," Chancellor of the Exchequer Jeremy Hunt said in a statement, adding: "It is our duty to help the Bank of England in their mission to return inflation to target by acting responsibly with the nation’s finances."

Although it was well flagged in advance, it was the rise in household energy prices that still accounted for most of the upside surprise in the numbers. The ONS said that prices for gas, electricity and other fuels rose by 24/3% from September, with gas prices rising nearly 37% and electricity prices rising just under 17%, even though the short-lived government of Liz Truss had taken measures to cap the rise. Without Truss's Energy Price Guarantee, fuel prices would have risen by nearly 75% from September, the ONS said, due to the formula used by the regulator Ofgem that ties maximum retail prices to developments in wholesale energy markets.  

In year-on-year terms, fuel prices were up 88.9% from a year earlier.

However, energy prices weren't the only element of the index responsible for the latest shock. Prices for food and non-alcoholic drinks also rose by 2.0%, to be up 16.4% on the year, the most since the 1970s. 

The concentration of price rises in food and energy means that inflation is hitting the poorest parts of the population hardest, given that they typically spend a greater share of their income on life's essentials. 

However, even after stripping out those components, "core" prices still rose by a chunky 0.7%, up from 0.5% in September.

The figures are the latest evidence of U.K. incomes failing to keep up with inflation this year, even though wages too are rising at their fastest pace in 20 years. Data released on Tuesday showed average earnings excluding bonuses rose 5.7% on the year through September.

One crumb of comfort from an otherwise depressing set of figures was that producer prices rose by less than expected, in a sign that companies who expanded their profit margins earlier are now having to show more discipline as demand weakens. The index of factory gate price only 0.3%, a rate unchanged from September, instead of accelerating to 0.5% as expected. 

Analysts expect the October numbers to represent the peak in annual inflation, as the sharp rises in crude oil prices that happened at the end of last year will create a higher base effect in the coming months. However, Hunt has signalled that the government cannot afford to subsidize household energy prices at the current rate beyond next April, leaving a high degree of uncertainty over how quickly inflation can come down.