Why the inflation nightmare could be only just beginning

Consumer prices soared 9pc in the year to April, the sharpest increase in the cost of living since Margaret Thatcher was in No10. The surge may prove to be the peak of Britain’s inflationary crisis, but there are signs elevated prices are here to stay – and could get worse.

These charts show there could be further nasty shocks coming down the line.

Producer prices are still soaring Hugely elevated inflation for Britain’s producers and manufacturers indicates a big price rise danger that still has not landed on consumers.

Input costs for producers are 18.6pc higher than a year ago, while output costs – the “factory gate” prices being paid by wholesalers – are 14pc higher.

This gap suggests manufacturers are not passing on their full cost increases, instead taking a hit to their own margins. That may shield consumers for now, but companies will likely pass on further price increases if the pressure grows too great.

Martin Mctague, national chairman of the Federation of Small Businesses, said: “The gulf between the rate of input and consumer price growth underscores business efforts to absorb costs rather than pass them on.”

It’s not just food and fuel

Energy has been the biggest driver of soaring inflation, with food also a big contributor. Russia’s invasion of Ukraine has made both factors worse, pushing oil prices higher and leading to widespread food shortages.

Andrew Bailey, the Bank of England Governor, surprised ministers earlier this week when he described food inflation as “apocalyptic”, and said that 80pc of the surge in inflation beyond his 2pc target is caused by factors beyond his control.

But “core” inflation – which strips out these volatile factors – is also soaring, pointing to how widespread

pressures are. Core prices are up 6.2pc in a year, the fastest pace since 1992. Around 80pc of the basket of goods tracked by the Office for National Statistics have seen price rises of 3pc or more.

Higher costs for services present a big danger here: given the importance of the services sector to UK GDP, rises here could result in sustained higher prices. Pantheon Macroeconomics’s Samuel Tombs said service price rises were the “main source” of April’s core inflation jump.

‘Ofgem will probably raise the energy price cap by another 30pc to 40pc in October. This will push inflation to 10pc’

Another huge energy price cap increase is coming

Many economists expect inflation to arrive in “twin peaks” this year, with April’s surge matched – or even surpassed – by a second surge at the end of the year.

That is because the energy price cap increase, which underpinned April’s jump, is set to be repeated – even more painfully – in October.

Thomas Pugh, from auditor RSM, said: “Ofgem will probably raise the energy price cap by another 30pc to 40pc in October. This will keep inflation high and push it to 10pc in October.”

If that happens, it would put consumer price inflation into double figures for the first time since the early 1980s.