Britain’s hard-pressed households have been warned to expect a fresh squeeze on their living standards in the coming months after the annual inflation rate climbed for a 13th month to its highest point in almost 30 years.
Economists said they expected the government’s preferred measure of the yearly jump in the cost of living – the consumer prices index – to rise from 5.5% in January to almost 8% in April when household energy bills will soar by hundreds of pounds.
The latest figures from the Office for National Statistics (ONS) showed that the least generous January clothing and footwear sales since 1990 were responsible for the 0.1 percentage point increase in the annual inflation rate last month. Prices actually fell on the month but by a smaller amount than in January 2021.
Rishi Sunak said the government understood the pressures people were facing with the cost of living, but the chancellor was warned by a leading thinktank that rising inflation meant it would cost the Treasury an extra £11bn this year to service the UK’s national debt of more than £2tn.
Isabel Stockton, a research economist at the Institute for Fiscal Studies, said interest payments on index-linked debt were calculated using an alternative measure of inflation – the retail prices index – which is running at 7.8%, considerably higher than anticipated in last October’s budget.
“As a result we now project that central government spending on debt interest this financial year will come in at around £69bn, some £11bn higher than the £58bn forecast in the October 2021 budget and £27bn above the £42bn forecast in the March 2021 budget,” Stockton said.
City economists had expected CPI inflation to remain at 5.4% in January and said the latest increase elevated the chances of the Bank of England raising interest rates for a third successive time when its monetary policy committee meets next month.
Business and consumer groups said the sharp rise in inflation would harm living standards and push more firms towards insolvency, while Labour and unions said the government was failing to tackle the UK’s worsening cost of living crisis.
The CBI business lobby group said the government needed to react by cutting taxes on investment to boost productivity and by allowing businesses to award sustainable annual wage rises. Frances O’Grady, the general secretary of the TUC, said extra energy costs and tax rises in April would force families to make savings elsewhere, meaning “business revenues will fall, and the [economic] recovery will be choked off”.
On Tuesday, official figures showed that a rise in annual wage growth in December failed to outpace inflation. With inflation expected to keep rising over the coming months, the Resolution Foundation thinktank said Britain was on track for the biggest squeeze on living standards in six decades.
Sunak defended the government’s response to the “global challenge” of high inflation, saying the Treasury would provide millions of households with up to £350 to help with rising energy bills.
Suren Thiru, the chief economist of the British Chambers of Commerce, said tightening monetary policy too quickly risked undermining confidence and the wider recovery. “[It] will do little to curb the global factors behind the current inflationary surge,” he said.
“More needs to be done to limit the unprecedented rise in costs facing businesses, including financial support for those struggling with soaring energy bills and delaying April’s national insurance rise.”
Despite January’s rise in inflation, the ONS said prices for goods and services decreased by 0.1% that month after restaurant and hotel prices – which played a large part in the inflationary increase before Christmas – fell back.
The rising costs of some household goods also pushed up inflation but were offset partly by cheaper petrol and diesel prices in January after record highs at the end of 2021.
Most economists expect inflation to fall in the second half of the year after reaching a peak above 7% in April, when the energy regulator, Ofgem, will raise the price cap on default tariffs by 54%, adding more than £600 to annual bills.
But the cap could be raised again in October unless the cost of gas and petrol on international markets drops as expected in the summer.
Last month, the Bank of England said inflation would peak at more than 7% in the spring but then decrease over the next two years to its target rate of 2%.
Pat McFadden, the shadow chief secretary to the Treasury, said the latest figures showed the cost of living crisis was not going away any time soon. “With inflation expected to rise even further, and working people already feeling the crunch, the Tories should have taken action by now,” he said.
“Instead, the chancellor’s buy now, pay later scheme on energy bills loads up debt for future years, while his tax rises will only make matters worse.”
