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UK inflation rose record highs in August

UK inflation rose record highs in August

The annual inflation rate rose by 3.2% in August, up from 2% in the 12 months to July, the UK Office for National Statistics (ONS) said on Wednesday. The month-on-month increase is the largest recorded since ONS began keeping registers in January 1997.
Some of the promises reflected corona aid programs that were in place last summer, such as cuts in sales taxes in the hospitality sector and the government’s “Eat Out to Help Out” initiative, which sharply reduced restaurant meals.
But the UK economy has also been under sustained upward pressure on prices driven by labor shortages and tightened supply chains linked to the pandemic and Brexit. It weighs on the economic recovery and could force the Bank of England to bring interest rate hikes forward if inflation stays above its 2% target longer than expected.
There were a record 1 million job vacancies in the UK in June to August, and wages rose almost 7% between May and July, according to ONS. Rising wages are coming as companies are already struggling with higher costs in their supply chains due to raw material shortages and rising shipping prices.
Restaurants, pubs and supermarkets, including Iceland Foods and Nando’s, have had to close in some places due to staff shortages or because they have run out of ingredients. McDonald’s (MCD) was forced to take milkshakes from his menu earlier in the summer.

Disruptions in the supply chain and shortages of workers hamper Britain’s economic recovery. GDP growth slowed sharply in July, accounting for the smallest monthly increase since February, the ONS said last week.

A ‘whiff’ of stagflation

The economy is still 2.1% smaller than before the pandemic, and economists at Berenberg now expect it to fully recover in the second quarter of 2022 instead of the first.

If prices continue to rise, there is a risk of stagflation, according to Berenberg senior economist Kallum Pickering, a phenomenon characterized by stubbornly high inflation and weak economic growth.

“The latest batch of UK data showing record demand for labor and rising wages, rising inflation but weaker than expected real GDP growth, has a touch of stagflation,” Pickering said in a research note on Wednesday. “Although the risk of such an outcome is still low, in our opinion it sets [Bank of England] nevertheless in a difficult position, ”he added.

The unexpectedly sharp rise in inflation could force the Bank of England to raise interest rates faster than expected, Pickering said.

The rise in inflation in the UK follows data from Tuesday, showing that inflation in the US slowed slightly in August as some price distortions eased, e.g. For used cars. But prices remain high throughout the economy amid persistent bottlenecks in the supply chain.

“There are too many reasons to expect supply shocks in other areas to be certain that inflation will not settle [a] slightly uncomfortable level in a sustained period, “Societe Generale strategist Kit Juckes said in a note Wednesday.

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