If you paid £1 for a loaf of bread in March 2021, you may have had to fork out around £1.06 for the same staple in March 2022, as per the Office for National Statistics’ (ONS) consumer price index including the owner occupiers’ housing costs (CPIH) measure of inflation.
Paying 6p more for a loaf of bread in March 2022 may have not broken the bank for many. However, the 12-month UK CPIH inflation rate of 6.2% applied to the cost of a household’s weekly food shop, the daily commute to work and big-ticket purchases demonstrates how affordability across the United Kingdom has come under significant pressure.
In addition, regular pay in real terms declined by 1.3% year on year in February 2022, according to the ONS.
An ever-widening gap between what society must pay, and what society can afford to pay, has spawned an irrefutable cost-of-living crisis in the domestic market.
Tightening monetary policy
UK inflation is running at its highest rate in three decades and far above the government’s ‘low and stable’ target of 2%.
The Bank of England (BoE), in an effort to nip inflation in the bud, though being careful not to deter spending too much and exacerbate an economic slowdown, opted to raise interest rates to 1% on 5 May 2022. Despite raising the base rate to its highest level since 2009, the BoE remains under pressure to tighten monetary policy further due to stubborn and widespread increases in prices.
Nonetheless, UK inflation has been broad-based, predominantly driven by external supply-side factors; these include the rise in energy prices resulting from the Russia-Ukraine conflict and growing tradable goods prices borne out from COVID-19-related disruptions. The spending power of UK consumers has not been a significant factor, suggesting that a harsher stance with regards to monetary policy would do little to clamp down on inflationary pressures.
The BoE expects underlying inflation, that is, the consumer price index, to rise to 10% in 2022 and economic growth to slow.
In its May 2022Monetary Policy Report, the BoE reiterates the role in which supply-side factors are playing in driving the UK towards a recessionary period, with fears that stagflation could materialise.
Hiked commodity prices
The primary channel through which the Russia-Ukraine conflict has had an affect the UK economy thus far is via hiked energy and commodity prices.
A significant share of global energy commodities is sourced from Russia; it accounts for more than 10% and 15% of global crude and natural gas production respectively.
The repercussions of the Russian-Ukraine conflict include restricted global supply by way of sanctions and other trading implications. As per the law of supply and demand, the wholesale market price of oil and energy commodities surged and, in turn, the prices charged by companies in the Electricity Supply and Gas Supply industries and in UK forecourts skyrocketed.
The BoE states that a 10% rise in a global index of commodity prices usually translates into a 0.5% fall in UK GDP and a rise in prices of 0.3%, and that these effects can last up to two years.
With regards to non-energy commodities, Russia and Ukraine together account for a substantial chunk of global production for a number of agricultural commodities, such as sunflower oil. The invasion has reduced the global supply of foodstuffs and, considering the length of agricultural cycles, current disruptions could affect non-energy commodity prices beyond the near term. Supermarkets in the UK have already moved to implement retail price increases across a number of product lines in response to commodity price rises.
Poor prospects
With news that inflation is envisaged to hit a double-figure percentage in 2022 and as the BoE warns of recessions risk and stagflation, consumer confidence has plunged.
The exchange rate of the pound, which can be used as a barometer for domestic market sentiment, hit a two-year low of 1.2393 against the US dollar on 5 May 2022, the day the BoE released its downbeat Monetary Policy Report. Confidence is low, inflation is high and market prospects are uncertain to say the least.
For more information on any of the UK’s 500+ industries, log on to www.ibisworld.com, or follow IBISWorld on LinkedIn and IBISWorldUK on Twitter.
