Commentators are warning of the risk of inflation and pressure is mounting on the Bank of England (BoE) to raise interest rates.
With input costs rising for firms and retail prices predicted to follow suit, expectations are that the BoE will increase the base rate from 0.1% to 0.25%.
In a report, Inflation returning – causes and consequences, James Walton, chief economist at retail think tank IGD, said: “General inflation in the UK has strengthened rapidly over half two 2021 – surprising some forecasters.
“Inflation is also emerging in the market for food and consumer goods, where price change is usually slow.
“Some commentators have suggested that inflation will be short-lived, but this should not be relied upon. Some inflation drivers may be persistent.”
IGD has identified six inflation drivers:
UK energy prices have doubled in 2021, affecting both businesses and consumers. At the same time food production is energy intensive – it takes five calories of energy to make one calorie of food, said IGD.
2. Input prices
The cost of fertiliser, made from natural gas and therefore linked to its price, is rising. Climate change has increased the risk of shocks to crop yields, while demand for all commodities is increasing as markets recover from Covid. In the UK, farm economics are likely to change as a result of Brexit and changes to the subsidy system.
3. Labour costs
Some 9% of EU workers have left the UK since the first quarter of 2021 and there is “little sign of a mass return”, said IGD. Many of these worked in food production. From 2022 the new health and social care levy will add 1.25% to employment costs. Wages are rising while employers are spending more on non-wage benefits to attract and retain staff.
Card and paper production is energy intensive, so costs have risen. Meanwhile Covid reduced recovery and recycling, while online retail increased demand for card. From 2022 a new plastics tax will apply to packaging that is not at least 30% recycled, while a transition to alternative materials may impact business economics. The UK government is consulting on Extended Producer Responsibility, under which “packaging producers will pay the full cost of managing packaging once it becomes waste”, according to the Department for Environment, Food and Rural Affairs.
The cost of international freight has risen sharply, with average container prices up 148%, including a rise of 308% on the Far East to Europe route. HGV driver shortages have pushed up costs, while Brexit border changes means costs for EU to UK trade will rise from January 2022.
6. Currency effects
The GB pound has weakened versus the US dollar in quarters two and three of 2021, pushing up the cost of imports and commodities, which are generally traded in dollars.
☛ Want to stay up to date with the news? Sign up to our daily bulletin.