U.K. Inflation Hits 40-Year High, Putting Government on Defensive

The pace is also above the 8.5% annual rate of inflation record by the U.S. in March, which had been the sharpest rise since the global inflation surge began with the reopening of many economies in early 2021 as the pandemic eased.

The U.K.’s inflation acceleration comes as its economy is slowing and facing a recession, economists and politicians say. They have warned that some consumers, especially those on low incomes, could struggle to pay for food and heating next winter, possibly threatening the government’s popularity and

Boris Johnson’s

future as prime minister.

Mr. Johnson’s Conservative Party suffered big losses in May municipal elections, especially in London, where he was once mayor. In addition to the squeeze on household incomes, Mr. Johnson’s support has been weakened by a police investigation that found he had broken his own pandemic lockdown rules. According to a

YouGov

opinion poll conducted last week, the Conservative Party has the support of 33% of voters, down from 44% at the 2019 national election, while the opposition Labour Party is supported by 38%, up from 32%.

The U.K. changes its ceiling on home energy prices twice yearly, with the next hike coming in October. As a result, rising wholesale energy prices in the months leading up to and during Russia’s invasion of Ukraine only reached British households in April. Home energy prices were 69.6% higher than a year earlier, the fastest rise on record.

The pickup in overall inflation was in line with the Bank of England’s expectations. It expects inflation to peak at over 10%, following the anticipated fall hike in home energy prices.

With the economy contracting in March, and vulnerable to recession in the coming year, central-bank policy makers indicated this month they would move cautiously with further interest-rate rises. The Bank of England has raised borrowing costs four times since December.

The surge in energy prices, in part a consequence of the Ukraine war, has hit household budgets hard, spurring calls for the government to provide further help for the poorest.

“Putting pounds in the pockets of people struggling the most should not be delayed,” said Tony Danker, director-general of the Confederation of British Industry, a leading business lobby group. “It’s the moral underpinning of our economy and society.”

Food prices are also rising rapidly, up 6.7% from a year earlier, the fastest rise since June 2011. The National Institute for Economic and Social Research estimates that 1.5 million households face food and energy bills that are larger than their disposable income. The Trussell Trust, a charity that helps poorer Britons, said demand for food parcels was 22% higher in the first two months of this year than in the same period of 2020, before the pandemic hit the U.K.

The U.K.’s very high inflation rate is due to a combination of factors. Like the rest of Europe, much of it is imported through higher energy prices, in contrast to the U.S., where strong demand plays more of a role.

But like in the U.S., the job market is very tight. The unemployment rate fell to 3.7% in the three months through March, the lowest since 1974, the ONS said Tuesday.

Wages also rose rapidly, but not enough to keep up with inflation. NIESR expects real disposable incomes to fall by 2.4% this year.

The U.K. faces unique price pressures as a result of its departure from the European Union, which has raised import costs and cut off access to a pool of European workers.

The economy could soon face fresh headwinds. The British government threatened Tuesday to tear up an important part of its Brexit divorce deal with the EU, a move that risks provoking a trade war.

That would create more problems for the Bank of England. “We would love not to have another shock, please,” Gov. Andrew Bailey told lawmakers Tuesday.

Write to Paul Hannon at [email protected]