Rising inflation puts squeeze on households and businesses

The rise in UK inflation will hit the lowest paid households hardest, squeeze margins for Lancashire businesses and lead to an 'uncomfortable' autumn for the prime minister and chancellor. 

That is the verdict of Emeritus Professor Joe Nellis, Head of Economic Research at Lancashire accountancy and advisory firm MHA. 

While the increase was ‘widely expected’, Joe has warned against a temporary inflation spike becoming structural, if expectations, wages and prices begin responding to it.

Inflation has risen from 2.6 per cent in June to 2.9 per cent in July, meaning higher energy costs will feed through into household bills and business costs. Joe says the UK now faces an ‘uncomfortable’ Autumn budget, as inflation rises just as economic growth requires support. 

Joe said: “This will be a setback for the Prime Minister, who has made tackling cost-of-living issues a central focus of his policy platform so far. Unfortunately, inflation will rise further in the coming months - the Bank of England expects inflation to average around 3.2 per cent in the final quarter of this year. 

“The Prime Minister and his Chancellor must consider how to create the conditions for economic growth, provide support for those struggling most with the cost-of-living, and curtail an ever-growing pool of public sector expenses: without contributing further to inflation.”

He added: “Much of the latest increase reflects higher energy costs as a direct result of the continuing tensions in the Middle East, rather than a sudden resurgence in underlying domestic inflationary pressures. This distinction really does matter, but households and businesses ultimately feel the increase in prices regardless of where it originates. 

“Global energy markets and geopolitical uncertainty remain significant risks that threaten the prospect of price stability. However, the rate of Inflation is still well below the peaks that were seen just a few years ago, while wage growth has moderated and some underlying price pressures have eased.

“If inflation fails to rise much higher than 3%, policymakers at the Bank of England may be able to justify holding rates at 3.75% for the rest of the year. But if inflation continues to surprise on the upside – and it could get closer to 4% – the Bank of England will be forced to raise interest rates. 

“More restrictive monetary policy would not be beneficial to an economy that is already expected to slow down later this year.”