UK inflation jumps to highest level in 10 years as energy bills soar

The UK energy regulator, Ofgem, lifted its cap on household bills on the back of rising wholesale gas prices to record levels. Photograph: Clynt Garnham Products/Alamy

The Guardian
By Richard Partington

Increase to 4.2% in October from 3.1% also driven by higher prices in restaurants and hotels

UK inflation has increased to its highest level in a decade, hitting a rate more than double the government’s target amid a severe cost of living squeeze from soaring household energy bills.

The Office for National Statistics said the consumer prices index measure of annual inflation rose to 4.2% in October, up from 3.1% in September – the highest rate since November 2011.

Driven by a dramatic jump in household gas and electricity prices, the figure was higher than forecast by City economists, with the annual inflation rate more than double the 2% target set by the government for the Bank of England.

The increase will put pressure on the Bank to raise interest rates from as early as next month amid growing concern over the cost of living. It comes after the energy regulator, Ofgem, lifted its cap on household bills after wholesale gas prices soared to record levels as economies around the world emerged from lockdown and supplies of Russian gas to Europe failed to meet demand.

Grant Fitzner, chief economist at the ONS, said it was clear there would be further inflationary pressures in the coming months after the German government suspended its approval process for the Nord Stream 2 gas pipeline, triggering an increase in wholesale energy prices.

“You will see gas prices have gone up in the last day or two following the announcement from the German government on the Nord pipeline. It’s not clear that energy prices have peaked yet,” he said.

UK inflation increased to 4.2% in October 2021 – its highest rate in 10 years

Reflecting a squeeze on household spending power, the jump in the annual inflation rate was also driven by higher prices in restaurants and hotels after a partial removal of a VAT cut for the hospitality sector, as well as soaring prices for secondhand cars.

Much of the increase reflected depressed price levels a year ago as the coronavirus pandemic dragged down economic activity around the world, including the worst recession in Britain for 300 years.

Inflation is based on the annual change in price for a basket of goods and services, meaning a temporary fall 12 months earlier can push up the headline rate. Economists expect that the inflation rate should ease as these factors drop out of the calculation.

Record gas prices are driving the rise in inflation

However, the costs of raw materials, wages and transportation to their customers have risen sharply since economies reopened and the latest CPI numbers suggest businesses have started passing those increases on to their customers.

Threadneedle Street has warned inflation will peak at close to 5% next year – in what it predicts will be a temporary increase gradually fading back towards its 2% target as disruption caused by the pandemic recedes.

The chancellor, Rishi Sunak, said many countries were experiencing higher inflation after the easing of lockdown restrictions and that the government was taking action to help consumers with more than £4.2bn of help.

“We’re helping people get into work, progress and keep more of what they earn, through our plan for jobs and by effectively cutting taxes for workers receiving universal credit,” he said.

However, the government has faced intense criticism for scrapping the £20-a-week uplift in universal credit in the biggest ever overnight benefit cut, as well as planning manifesto-busting tax increases and suspending the pensions triple lock.

Rachel Reeves, the shadow chancellor, said households would be left more than £1,000 worse off next year due to higher levels of inflation. “Instead of taking action, the government are looking the other way, blaming ‘global problems’ while they trap us in a high tax, low growth cycle,” she said.

“Labour wouldn’t be hitting working people with a tax hike, and as heating bills rise, we’d cut VAT on domestic energy bills now for the winter months, to help ease the burden on households.”

Jack Leslie, a senior economist at the Resolution Foundation, said the rate of inflation had increased at its fastest rate over the past year since at least 1989 – a shift that meant real wages were already falling and were likely to continue to do so for the next six months.

“We could be set for a sustained period of shrinking pay packets,” he said.