The Bank of England has struggled to understand why inflation remains high in the UK. It has fallen in France, Germany, the US and especially Spain, where inflation dropped to 2.9% in May compared with the UK figure of 8.7%. Here we look at the many reasons for the current crisis.
Insurance
Motor insurance unexpectedly soared by 43.1% over the past year. Some firms, such as Direct Line, have been criticised for even greater increases. Record car prices during the pandemic and the higher cost of repairs are to blame, say analysts.
The ONS measures insurance quotes, so there is the opportunity for people to shop around and reduce the annual cost. But the industry exploits inertia, leaving many people to pay much higher rates than a year ago. All forms of insurance rose by a chunky 18.5%.
Air fares
Flying has become a must-have for many people. Despite concerns about the environmental impact, airline bookings have rocketed this year. While bicycle prices increased by only 0.9% over the year to May, and motorcycle prices dropped 0.7%, air fares soared by 31.4%
Ryanair, Europe’s largest airline, reported a near-record €1.4bn (£1.2bn) profit last year and expects to better that in 2023, fuelled by a summer boom the company says will see a record number of passengers.
Wages
For the first time since the Bank of England began to worry about the effect of wages on inflation, Andrew Bailey, its governor, said the main driver of wages growth were City workers.
“Pay growth in lower-paid sectors like wholesaling, retailing, hotels and restaurants had been broadly flat,” said the minutes of the monetary policy committee (MPC) meeting last week. It shied away from pointing out these workers received 5.1% pay rises on average while those in the financial and business services sector (City traders, accountants, lawyers and advertising executives) were given pay rises above inflation at 9.2%.
Profits
Bailey also attacked companies that are rebuilding their profit margins, using the current panic over inflation as a cover. US academic Isabella Weber and Paul Donovan at UBS Wealth Management are among the economists to make the most fuss about how profiteering multinationals lie behind much of the inflated prices we see in the shops. Sharon Graham, the Unite general secretary, is funding research that dissects the accounts of companies to determine who is profiteering. Nestlé and Procter & Gamble are among the many firms to successfully maintain their profit margins over the last year.
Food
Poor harvests, Brexit-related hold-ups at UK ports and price-gouging by food distributors have all been blamed for the sharp increase in food prices over the last year. It is hoped the inflationary peak has passed after the latest figures showed prices rising at 18.7% a year rather than the 19.6% seen in March.
Milk and pork are among the many products to soar in price by more than 20% since last year, but the 49.8% increase in sugar tops the lot. Bad harvests are again to blame for raising the global price of sugar, but a switch to using sugar cane to make ethanol while fuel prices are high has also denied cake-makers access to a previously cheap ingredient.
Recreation and culture
Beyonce’s spectacular concerts in Cardiff, Edinburgh, Sunderland and London that cost more than £100 for a standing ticket took place too late in the month to be measured by the Office for National Statistics (ONS) in May’s inflation figures. But according to HSBC economist Chris Hare “it’s possible the strength in computer games prices might have been partly due to the release of the - aptly titled - Legend of Zelda: Tears of the Kingdom in May.
Recreation and culture added 0.06 percentage points to the consumer prices index (CPI), which is a significant boost from a tiny sector that in more normal times has almost no impact on inflation.
