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Inflation is back, but Sunak is determined to take money out of our pockets Inflation

Prices are rising in stores and consumers are facing an autumn bang. Official figures show that inflation rose the fastest in a decade in August as the impact of Covid-19 and Brexit drives up living costs.

Exceeding urban economists’ forecasts, the 1.2 percentage point increase in the consumer price index was the largest since Gordon Brown gave the Bank of England independence to control inflation in 1997. At 3.2%, the CPI is now the highest since March 2012.

Questions are being asked about how Threadneedle Street will react. But there is a tougher challenge for the Treasury: is this really the right time to take more money out of people’s pockets?

Despite rising cost of living, it is similar to the plan where the largest level of social security ever planned for universal credit, a public sector pays freezing and increase in national insurance contributions.

September is the month when NHS employees get an extra blob of cash in their paychecks from the government’s pay deal, announced in July, back to April. While this will help, the paychecks will also come as staff see their pay rise of 3% erased by the rising cost of living.

Combined with the end of this month, government plans will take a significant demand out of an already declining economy. Build back better could soon be confused through more of the same, in a restart of the 2010s, when the recovery from the financial crisis was stifled by austerity measures that hit household consumption power.

Lack of workers and materials has weighed on activity in recent months and brought growth close to a halt. As the Delta variant threatens a difficult winter ahead, experts warn that the UK economy is heading for a tough spot.

Alarm bells should ring in the treasury, yet Rishi Sunak appears as a sanguin. There are reasons why the Chancellor can comfort himself. The Bank of England expects inflation to fall back from a high of close to 4% this year as temporary factors decline.

With CPI based on the annual change in the price of basket of goods and services, much of the recent increase reflects a sharp setback from a record decline last year. Therefore, record increases in the last 12 months would continue to set new records in the next 12, and this is unlikely.

The biggest factor in August was the Chancellor’s Eat out to help the scheme a year earlier, when Sunak’s dishes at half price temporarily reduced the cost of living. The ONS said inflation should have been at least 0.4 percentage points lower as a result.

Although the chancellor won praise for helping household finances last year, the pressure is rising for the opposite reason.

Business leaders warn that supply disruptions could last at least two years, and some changes will prove to be permanent, particularly as Brexit creates tougher trade barriers and reduces the supply of EU workers in the UK.

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Supply chain disruptions have been worst since the 1970s, with companies reporting a record number of vacancies. Shipping costs have quadrupled, the cost of raw materials to producers has risen and global energy prices have hit record highs.

As growth hits a soft patch in the fall, economists warn that there is a pinch of stagflation in the air. It will be an unpleasant period for the Treasury and the Bank of England to weather, but still tougher for hard-pressed British households.

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