Inflation is falling in the UK and is likely to stay on a downward trajectory throughout next year. That’s the good news.
The bad news is that inflation will continue to be high relative to wages and pension incomes, eating into living standards.
The Bank of England is poised to make the situation even worse with an anticipated increase in interest rates when its policymakers meet on Thursday that will tighten an already excruciating financial tourniquet on mortgage holders.
Renters cannot escape higher mortgage costs either, now that every landlord in the country, from the major corporations to the individual buy-to-letter, is mortgaged up to the hilt. They pass on the cost of loans to renters, many of them trapped in the sector because they lack a deposit to buy a home.
Businesses will also feel the pinch from higher interest charges, especially if they have found it necessary to borrow heavily through the coronavirus pandemic and the more recent period of escalating energy costs.
No wonder that the biggest contributor to inflation in November was the hotel, hospitality and restaurant sector, which consumes large amounts of energy relative to other costs and must find it difficult to cut back without presenting customers with a woolly blanket and cold food.
There are reports of cancelled wedding plans and a return to watching TV at home as the price of a night out escalates to previously unknown heights.
The Office for National Statistics said the rise in prices across this sector reached a record 10.2% last month.
Like food and clothing, the hospitality sector usually acts as a brake on inflation. McDonald’s and KFC are known for keeping the price of burgers and fried chicken at rock bottom levels, so when they jack up their prices it proves to be a shock.
Of course, few people need to stay in a hotel, go to the pub or have a spa day. It is not essential. But Britons have become increasingly American in their eating habits in recent decades. Dining out and online deliveries to the home have become a mainstay for many households, and now count among the main items in the basket of goods used to calculate the consumer prices index.
Meanwhile, large consumers of energy, such as major manufacturers, have begged the government for help with their rocketing bills. Although many have found ways to cut back on energy consumption, they still feel the pain from elevated prices.
Without help, many firms are expected to go under. The latest government data released on Wednesday showed there were 2,029 company insolvencies in England and Wales in November – 21% higher than in the same month last year and 35% higher than pre-pandemic levels.
Other businesses will cut back on production. Foreign owners are known to have scaled back investment, with some privately blaming the lack of government support, although the debilitating consequences of Brexit and chronic skills shortages feed into that decision as well.
The chancellor, Jeremy Hunt, wants everyone to take it on the chin, as if high inflation is the consequence of a war and there needs to be a bit more Blitz spirit from workers.
Ukraine is partly to blame for the inflation we are experiencing now but a wartime can-do attitude is difficult to stimulate when there are huge numbers of people largely untouched by the effects of inflation.
Consumer spending for high-end goods is holding up, and not only because the cheap pound is encouraging tourists to flood London’s high streets. The better-off have escaped the worst of the energy crisis. Back in March, City firms were paying bumper bonuses, and many of the big accountancy and legal firms have reported record profits.
Inflation is an inconvenience to them, whereas the household on average incomes is hurting badly.
Benjamin Trevis, an economist at the Cebr consultancy, said falling real wages will force the average household to make severe cuts.
“The Christmas season looks marred with tough decisions for many households,” he said, adding that all the time Britain relies on consumer spending to drive growth, there won’t be any for some time.
The situation might begin to improve next summer, he said, but by then many people will be much poorer.
