We can beat it – if we don’t surrender to striking unions

THE surge in Britain’s headline rate of inflation to 11.1 per cent, the highest level in 41 years, will come as no surprise to consumers or businesses. Any supermarket shopper will have noticed that their weekly budget now goes nowhere near as far as it once did.

Mortgage-payers who are not on fixed deals will have been clobbered by interest rate rises. And autumn utility bills will come as a nasty shock to many, in spite of the price limit for typical households introduced by Liz Truss’s shortlived government.

The jump in consumer prices may be greater than most analysts were expecting, but the truth is there is no need to panic.

All the indications are that, as energy costs subside and the supplychain bottlenecks caused by Covid-19 lockdowns evaporate, the cost of living crisis should ease.

Whisper it, but after the botched mini-Budget and the interest and mortgage rate jumps of last month, the pressure could start to subside next year.

The timing of the release of the inflation data, on the eve of Jeremy Hunt’s first Budget, should help to make his austerity package more palatable.

The Chancellor argues that the insidious impact of higher prices makes it all the more necessary to limit government borrowing by reining in public spending and increasing taxes.

In a reversion to Treasury orthodoxy, after the disastrous market reaction to Truss and Kwasi Kwarteng’s tax-cutting proposals, Hunt wants government policy and the Bank of England’s interest rate rises to be pulling in the same direction in the global battle against higher prices.

And there are early indications that this is a fight that is winnable.

Much of the upsurge in inflation can be attributed to higher fuel costs, in spite of the Energy Price Guarantee of £2,500 per typical household for this winter.

This is exacerbated by the lingering effects of earlier rises in world oil prices, which are still impacting commercial transport costs and, in turn, increasing the cost of food distribution.

But wholesale gas prices have started to fall as the major European economies, once heavily reliant on imports from Russia, have begun finding alternative sources in Africa, the Middle-East and even the US.

The biggest risk now for the UK is that pay settlements get out of hand. This is exactly what happened in the 1970s and 1980s, when the country was caught up in a wage-price spiral as salaries chased costs upwards.

That is why it is so important for the train operators, the Royal Mail and even the NHS to hold the line in resisting inflation- busting settlements.

WERE we to lose control of wage inflation, the Bank of England would have no other choice but to raise interest rates above the peak, which is now expected to be in the 4 per cent to 5 per cent range, compared with the current rate of 3 per cent.

The stabilisation of financial markets since Rishi Sunak entered No 10 should help.

The pound has strengthened from $1.03, towards the end of September, when concerns about the Truss/ Kwarteng mini-Budget were at their height, to $1.20 this week.

A stronger pound acts as a barrier against inflation by lowering the costs of imported goods, including fresh food.

Similarly, the restoration of calm in the market for UK government bonds reduces pressure on mortgage rates — a key component in housing costs and a big share of many households’ expenses.

Much of this is encouraging in terms of the inflation rate, but the nation still faces traumatic months ahead before it can look forward to sunnier times.

Tomorrow’s Budget will almost certainly see millions of workers dragged into higher tax brackets, and the dream of a growth-led turnaround of the British economy will have been extinguished for the foreseeable future.