Inflation hits highest level in a decade at 4.2% as fuel and energy bills soar
The rate of inflation has hit its highest level for a decade as prices rise across the UK economy, with fuel and energy costs leading the way.
The Office for National Statistics (ONS) reported that the consumer prices index (CPI) measure jumped to 4.2% in October from 3.1% the previous month – a bigger leap than economists had predicted and piling pressure on the Bank of England to act.
The figures showed that the 12% increase in the energy price cap on household bills on 1 October was among the factors contributing the most to the spike alongside education, transport, eating out and fashion costs.
ONS chief economist Grant Fitzner said of the rise: “This was driven by increased household energy bills due to the price cap hike, a rise in the cost of second-hand cars and fuel as well as higher prices in restaurants and hotels.
Used cars are in high demand as production of new vehicles is hit by a global chip shortage
“Costs of goods produced by factories and the price of raw materials have also risen substantially, and are now at their highest rates for at least 10 years.”
The latter comment represents a warning that the pace of price increases shows no sign of letting up as those costs prepare to enter the UK’s supply chain crisis which is also being complicated by a shortage of labour.
Chancellor Rishi Sunak responded: “Many countries are experiencing higher inflation as we recover from COVID, and we know people are facing pressures with the cost of living, which is why we are taking action worth more than £4.2bn to help them.
“We’re helping people get into work, progress and keep more of what they earn, through our Plan for Jobs and by effectively cutting taxes for workers receiving Universal Credit.
“We are also providing more immediate support, including through the £500m Household Support Fund for the most vulnerable families, fuel and alcohol duty freezes, and the energy price cap.”
But the cap is tipped by economists to add even more fuel to the inflation fire in the spring, when the next review takes effect, if it fully reflects rises in wholesale gas costs since last summer.
A report by the RAC motoring group on Wednesday showed a third of motorists were already driving less as petrol and diesel costs hit new record levels daily.
The average cost of unleaded is nearing 150p-per-litre while diesel is already at that level. Pic: AP
The ONS report was the first measure of the pace of annual price increases since the Bank of England shocked financial markets earlier this month when it held off on raising interest rates to curb inflation expectations, despite forecasting the CPI measure would hit 5% in the coming months.
The Bank, which said it had wanted to see how the jobs market responded to the end of the furlough scheme, has a 2% inflation target.
It has argued that much of the price growth, as witnessed with the surge in wholesale energy costs this year, will be temporary as it is a consequence of economies reopening after COVID-19 disruption and out of its control.
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‘Interest rate rise wouldn’t tackle supply issues’
It will take some comfort from the fact that separate ONS figures have shown household spending power holding up as policymakers fret that fears of inflation are driving unsustainable pay awards.
The underlying pace of growth in wages – taking into account workers going back on full pay after furlough and how job losses during the coronavirus lockdowns fell most heavily on lower-paid workers – stood between 3.4% and 4.9% for regular pay in the three months to September.
Yael Selfin, chief economist at KPMG UK, said: “While not unexpected, confirmation that inflation is moving further away from its 2% target may seal the Bank of England’s resolve to raise rates in December, following the strong labour data released this week.”
The average price paid for comprehensive motor insurance rose 1% in the first quarter of the year, according to industry data indicating an easing in the steep rises seen last year.
The latest tracker issued by the Association of British Insurers (ABI) showed a 1% increase on the previous three months to £635.
That was despite the average claim paid rising 8% to reach a record of £4,800 pounds, the body said.
The ABI said the disparity showed that its members were “absorbing” additional costs and not passing them on.
Premiums hit record levels last year to reflect a surge in additional costs and claims.
The ABI reported a 23% hike in 2023, compared with the year-ago period, with £9.9bn paid out in claims.
That was the highest annual claims figure since the ABI started collecting the data back in 2013, the organisation said.
Insurers had flagged a 16% spike in the cost of paint, with spare parts also rising on average by a double-digit figure.
Other bills, largely driven by the price of energy, were up by 46%, the ABI’s report had said.
They included delays in repair and supply chains and the fact that increasingly sophisticated car technology made repairs more expensive.
The rise in premiums also reflected, it warned, a surge in uninsured drivers who did not take out policies likely because of pressure on their personal finances from the wider cost of living crisis.
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Interest rate cut hopes pushed back
The 1% rise in premiums could reflect growing regulatory pressure on the industry.
Insurers faced a further warning from the Financial Conduct Authority (FCA) in March over values placed on written-off and stolen cars.
The watchdog said it was concerned that insurance customers were only getting a better deal in settlement of their claim when they complained.
The industry has also faced accusations that drivers who can’t afford to pay for cover annually were being stung with high levels of interest.
The consumer group Which? recently found APRs being applied to monthly payments of almost 40%.
The average rate across 27 providers that charge interest and disclosed their rate was 23.37%, its report had suggested.
Which? demanded action from the FCA.
The ABI responded last week to insist that its members were taking action to address the concerns.
Its director of general Insurance policy Mervyn Skeet said of its latest tracker data: “We understand that car insurance costs are putting pressure on household finances.
These figures show how competitive the motor market is, with insurers absorbing significant cost rises but keeping prices relatively stable.
Which? director of policy and advocacy Rocio Concha said in response: “While it’s encouraging to see the price of premiums steadying, they still remain eye-wateringly high and prohibitively expensive for many drivers.
“It won’t be lost on motorists that premiums increased by a quarter in 2023 compared to 2022.
“To make matters worse, some who can’t afford to pay for their annual cover all in one go are being stung with interest on monthly repayments of up to nearly 40 per cent, which can add hundreds of pounds onto the final bill.
“The regulator needs to get a grip of the issue quickly by making clear that insurers squeezing customers paying monthly with excessive interest rates to make higher profit margins than those paying annually does not meet fair value requirements, and setting deadlines for firms to fix this.”
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