UK inflation rate hits 41-year high of 11.1 per cent as recession looms

Key points

  • CPI rocketed to an unexpectedly high 11.1% in October, its highest since 1981.
  • Rising prices have hit consumers and businesses even as growth grinds to a halt.
  • Food price inflation rose sharply to 16.5 per cent, the highest for 45 years.

Warsaw: Britain’s rate of inflation hit a 41-year high in October on the back of rising energy and food prices fuelled by the economic fallout of Russia’s invasion of Ukraine.

The Office for National Statistics said the rate rose to 11.1 per cent from 10.1 per cent in September, putting inflation at its highest level since October 1981. Several economists had expected a rate of around 10.7 per cent.

Wage growth in the United Kingdom was outstripped by inflation, data from the Office for National Statistics showed.Credit:Getty Images

Rising prices have hit consumers and businesses even as economic growth has ground to a halt, with the economy contracting slightly in the third quarter. The higher cost of living has increased pressure on wages and resulted in strikes by nurses, railway workers, Royal Mail postal workers and university lecturers over pay as inflation eats into their earning power.

Data from the ONS showed that wage growth was outstripped by inflation.

The dramatic rise in the cost of living came despite the British government’s energy price guarantee, which capped bills for gas and electricity at £2500 ($4394) for a household with average consumption of both fuels.

Food price inflation rose sharply to 16.5 per cent on an annual basis, the highest for 45 years, according to the ONS. It has been rising since last year as pandemic restrictions were eased and demand for oil, raw materials and food outstripped supply.

Core inflation, which excludes volatile food and energy prices, held steady at 6.5 per cent in October, the same rate as in September.

Grant Fitzner, chief economist at the ONS, said rising gas and electricity prices drove headline inflation to its highest level in more than 40 years, with gas prices having climbed nearly 130 per cent while electricity has risen by around 66 per cent.

“Increases across a range of food items also pushed up inflation,” he said.

“These were partially offset by motor fuels, where average petrol prices fell on the month, while the price for diesel rose, taking the disparity in price between the two fuels to the highest on record.

There was further evidence that costs facing businesses are rising more slowly, driven by crude oil and petroleum prices.”

Britain has been gripped by a period of economic and political turmoil which was triggered by tens of billions of unfunded tax cuts and energy subsidies announced by former prime minister Liz Truss and former chancellor Kwasi Kwarteng – who lasted just 38 days in the job – in September.

Kwasi Kwarteng and Liz Truss.Credit:Getty

The absence of a plan to reduce government borrowing over the medium term spooked investors, leading to a collapse in government-bond prices and the departure of Truss a month later. The Bank of England bought government bonds to prevent a market meltdown.

Although energy bills rose, the price cap is expected to knock several percentage points off-peak inflation, where households are also being helped by a £400 discount on their electricity bills. It came in last month courtesy of the short-lived Truss government and is being paid in six monthly instalments.

The Bank of England, which has increased interest rates eight times over the past year from a low of 0.1 per cent in December to 3 per cent this month, now expects inflation to peak around 11 per cent, rather than its previous estimate of 13 per cent. It has forecast that CPI will then fall back to about 5 per cent by the end of 2023.

Chancellor of the Exchequer Jeremy Hunt said the aftershock of COVID and Russia’s invasion of Ukraine was not only driving up inflation in the UK but around the world.

“This insidious tax is eating into pay cheques, household budgets and savings, while thwarting any chance of long-term economic growth,” he said,

“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. That requires some tough but necessary decisions on tax and spending to help balance the books. We cannot have long-term, sustainable growth with high inflation.”

European governments are providing costly support to households to prevent widespread hardship as higher energy bills make paying for food and shelter more challenging, and to maintain popular approval of their support for Ukraine through sanctions on Russia.

Half of the OECD countries posted double-digit inflation rates in September, with the highest rates seen in Estonia, Hungary, Latvia, Lithuania and Turkey (all above 20 per cent). Food and energy prices inflation continued to be the main contributors to headline inflation in France, Germany, Italy and Japan.

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