Andy Burnham made an early decision as the prime minister to cut VAT from electricity bills to ease the pressure on households. Photograph: James Manning/PAView image in fullscreenAndy Burnham made an early decision as the prime minister to cut VAT from electricity bills to ease the pressure on households. Photograph: James Manning/PAAnalysisRising inflation underlines scale of Andy Burnham’s cost of living challengeHeather Stewart Economics editorPM’s plan to shield households from more pressure risks being overwhelmed by wider price rises
July’s increase in inflation, to 2.9%, is likely to be the first of several, underlining the challenge facing Andy Burnham in shielding consumers from a fresh cost of living squeeze this autumn.
Rising energy bills, as an increase in Ofgem’s quarterly price cap came into force, were the main driver of the jump in inflation, from 2.6% in June.
That was partly offset by cheaper fuel prices – the knock-on effect of hostilities easing in the Middle East, after Donald Trump hailed his “memorandum of understanding” with Iran in June.
However, fuel prices have risen again in recent weeks as hopes of a permanent end to the conflict faded, and another increase in the Ofgem price cap for household energy bills in Great Britain is expected in October.
Burnham’s early decision as prime minister to cut VAT from electricity bills will help to ease the pressure on budgets, but it risks being overwhelmed by wider price rises.
Food prices have been remarkably quiescent so far in the face of the conflict, rising at an annual rate of only 1.3% in July, down from 1.7% a month earlier. But it is likely there is worse to come, as a result of extreme heat and drought through the summer months.
As Liliana Danila, the chief economist of the Food and Drink Federation, put it: “Supply chain disruption isn’t going away. Alongside geopolitical volatility, extreme weather will continue to put pressure on the price of key ingredients. This makes it increasingly difficult for food manufacturers to shield consumers from price rises and protect their own resilience.”
While consumers face a tough autumn ahead, there was little in the latest inflation data to concern the Bank of England yet, as its policymakers judge whether they need to raise interest rates next month.
Core inflation, which excludes volatile fuel and food to give a picture of underlying inflation pressures, was unchanged at 2.6%; and Tuesday’s snapshot of the jobs market showed wage growth slowing.
That suggests dreaded “second round effects”, in which workers bid up their wages and embed inflation in the wider economy, are yet to materialise.
However, weak pay growth also means consumers will be feeling the full force of rising inflation – which will increase the clamour for help.
The TUC general secretary, Paul Nowak, said: “with inflation ticking up because of rising energy bills – and no end in sight to Trump’s illegal war in Iran – we are going to have to see more government action to support households in the coming months.”
As the new chancellor, John Healey, weighs the price of energy support for struggling households, however, he will have to contend with higher borrowing costs.
Rising inflation is one factor contributing to the government bond sell-off that has been sweeping major markets in recent days – driving the yield, or interest rate, on 10-year UK government bonds to an eye-watering 5.05%.
If it continues into the autumn, that will have a knock-on effect for the public finances, pushing up the Treasury’s interest bill.
The TUC’s solution is to pay for an energy package by slapping a windfall tax on the UK’s banks – which the financial sector, led by JP Morgan, is already lobbying hard against.
With only 10 weeks to go until Healey’s first budget, his choices, in the face of this latest inflationary squeeze, will reveal much about the Burnham government.
