ALEX BRUMMER: Britain was hit by a perfect inflation storm, but dithering only made it worse 

Rishi Sunak’s goal of curbing runaway inflation this year as a first step towards restoring the economy ahead of the next election has been dealt a crushing blow.

Data from the Office for National Statistics shows that consumer prices in the UK are still rising at an annual rate of 8.7% – much faster than any of our advanced competitors in Europe and North America.

This means the Bank of England will have little choice but to raise interest rates by at least a quarter of a percentage point to 4.75% tomorrow, with some in the City predicting an even bigger rise of half a percentage point.

As a result, homeowners are facing a huge jump in mortgage payments, with the cost of two-year fixed-rate agreements rising to 6 percent or even higher.

The failure of the Bank of England’s successive rate hikes – tomorrow would be the 13th in a row – to bring inflation under control will be a huge disappointment to the government.

Data from the Office for National Statistics shows UK consumer prices are still rising at an annual rate of 8.7 per cent

It had been assumed that, as the impact of Covid-19 on supply chain costs fades and the energy shock of Russia’s war on Ukraine works its way through the system, the rate of cost of living increases this year will a shock would subside. summer. Senior Treasury sources had predicted a drop of as much as five percentage points.

That is certainly the trend we have seen across the continent, where inflation has fallen to 5.1% in France and to 6.1% in Germany and the Netherlands.

The picture is even brighter on the other side of the pond, where inflation fell to 4 percent last month, allowing the US central bank, the Federal Reserve, to pause its rate hike sequence.

So what lies behind our stubbornly high inflation?

The answer is a perfect storm of factors: rising energy and food prices, labor shortages and wage increases.

While our international competitors have suffered from elements of this, none have experienced them to the same extent as we have.

Take our dependence on imported gas to heat our homes. Although gas prices are now almost half what they were in spring 2022, they remain relatively high. This puts us at a disadvantage compared to countries such as France, which is more dependent on electricity, and Southern Europe, which has much milder winters.

This means the Bank of England will have little choice but to raise interest rates by at least a quarter of a percentage point to 4.75% tomorrow.

It’s the same story when it comes to food inflation. The UK imports as much as 46 percent of its food and, as an island nation, has higher transport costs than many countries in mainland Europe, which are generally much more self-sufficient.

For example, France imports less than 10 percent of its food. In Germany it is 7.8 percent.

Wage inflation is also a major problem. There are currently over a million job vacancies in the UK and the magnitude of the labor shortage has pushed up private sector wages. This puts upward pressure on the price of air travel, leisure and cultural goods, including hotels, restaurants and telephone, video and internet connections.

There must now be deep suspicion that the providers of such services are using the cover of inflation to increase profit margins at the expense of consumers – what is known as ‘greed’.

In the public sector, the wave of wage strikes prompted by the cost-of-living crisis means that wage inflation has become embedded in the system.

But despite these mitigating factors, neither the Treasury nor the Bank of England should be taken off the hook. Neither agency seemed to understand the magnitude of the impending threat and once inflation started to pick up, they were too slow to nip it in the bud.