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Inflation will rise to 11%, warns Bank of England

The cost of food, energy and fuel has hit the highest level since March 1982. According to the Office for National Statistics, the Consumer Prices Index (CPI) has risen by 9.1 per cent in the 12 months to May 2022, up from 9 per cent in April.

On Thursday, the Bank of England said that the rate of inflation is expected to keep rising, estimating an 11 per cent markup in October this year.

The statistics come as rail workers and unions are campaigning against conditions, cuts and below-inflation wage proposals. On Tuesday, the industry saw severe travel disruption, with further strikes scheduled for Thursday and Saturday.

Mick Lynch calls for pay increase to meet inflation
General Secretary of the RMT, Mick Lynch

1970s-style “inflationary spiral”

In a BBC-commissioned survey of more than 4,000 people, 82 per cent said they thought their wages should increase to meet the rising cost of living. But the Chief Secretary to the Treasury, Simon Clarke, has warned against big pay increases.

Mr Clarke said increasing salaries to meet the rising price of goods and services could see a 1970s-style “inflationary spiral”. He said that organisations need to be “very careful” as pay increases could help drive up the cost of living, warning that UK inflation has the potential to become a “self-fulfilling prophecy”.

In April, the National Living Wage rose by 6.6 per cent to £9.50 an hour. However, April also ushered in the new Health and Social Care levy which means anyone earning more than £9,880 per year (£12,570 from July) is required to pay 1.25p more in the pound in National Insurance contributions.

Workers and unions are calling for wages to increase

The Rail, Maritime and Transport (RMT) union is calling for wages to increase by 7 per cent, while employers have offered a maximum rise of 3 per cent. Unison, the largest trade union in the UK, has accused ministers of “living on another planet” over “talks of public sector pay restraint”. Jon Richards, assistant general secretary of Unison said: “Under-pressure health, care, school and council services desperately need staff to be given a pay boost that matches runaway prices.”

The rail sector is not the only industry to demand action, the National Education Union (NEU) has criticised the 3 per cent pay increase and called for an “inflation-plus increase for all teachers”.

Commenting on the backlash, Deputy Prime Minister Dominic Raab, told the BBC’s Today programme: “We have got to stop making the problem worse by fuelling pay demands that will only see inflation stay higher for longer and that only hurts the poorest the worst.”

Key drivers behind the rising rate of inflation

Increases in household energy and petrol costs, partly due to the Ukrainian war, have been one factor behind the climbing rate of inflation. After a rise in the UK’s energy price cap in April, the Government reported a 95 per cent and 54 per cent increase in domestic gas and electricity prices in just a year. The average petrol prices have also reportedly hit 186.59p per litre in June, the highest price on record.

Another key driver of inflation is the rising cost of consumer goods, underpinned by unprecedented demand and supply chain bottlenecks. Andrew Bailey, the Governor of the Bank of England has said rising global food prices are a “major worry” and Ronald Kers, the boss of food firm 2 Sisters has warned that food prices could rise by up to 15 per cent this year.

Final thought

While the Bank of England typically responds to inflation with increasing interest rates, a new strategy needs to be implemented to curb the cost-of-living crisis. When inflation is driven by external factors, such as the global increase in household energy and petrol prices, traditional responses should be reformed to ensure mortgage payments don’t shoot up.

Sunak told reporters that the UK had “all the tools we need” to combat inflation. “Firstly, the Bank of England will act forcefully to combat inflation,” he said. “Secondly, the government will be responsible for borrowing debt, so we don’t make the situation worse and drive-up people’s mortgage rates any more than they’re going to go up.”

To bring down the rate of inflation, pay increases need to be scrutinised so that they’re not only affordable and proportionate to the taxpayer, but fair to the public sector.

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