Since the last update the living standards within the UK have declined as inflation has been a key theme in the economy. The International Monetary Fund (IMF) cut its forecast for GDP to 3.7% from 4.7% in January, whilst for 2023 the growth rate has almost halved to 1.2%. The IMF expects the UK will face the weakest growth and the highest inflation of any G7 country in 2023.

As a deep dive into the causes of global inflation, energy prices surged as the war in Ukraine pressured global oil and gas supplies. Crude oil prices reached above US$100 per barrel (a 20% rise from the previous month) whilst the price of industrial metals also rose significantly given concerns about war-related disruptions. Nickel prices rose as much as 250% over two trading days at the beginning of March that ultimately led the London Metals Exchange to suspend trading and cancel deals. Lockdowns in China impaired the production of zinc, whilst copper inventories fell for a third straight week as covid restrictions impacted inflows. Aluminium prices rose after Australia stated that it would ban aluminum exports to Russia. The price of agriculture & livestock commodities also increased over the month as the Ukraine /Russia conflict impacted key corn and wheat supplies. Additionally, the price of cotton and cocoa rose due to adverse weather whilst sugar prices increased as energy producers converted more cane to ethanol to support the energy supply shortage. This vast increase in key commodities prices has fed through into increased production and consumption costs, causing the general inflation in the economy.

Chancellor Rishi Sunak released his Spring Statement, which provided the half yearly update on the UK economy and a few policy amendments since the full Autumn Statement. Unfortunately the statement didn’t help with the cost-of-living crisis with inflation surpassing a 30-year high. 

Based on lagged data reported by the UK’s national statistician (the Office for National Statistic “ONS”) the UK economy’s expansion has slowed according to standard measures. GDP growth increased by 0.2% during February 2022, compared to a 0.8% rise in January 2022. This means the UK marginally produced/consumed more good and services than the previous month.  The main contributor to GDP growth were services which grew by 0.2%, mainly driven by tourism related industries and consumer facing services. Production and construction fell by 0.6% and 0.1% respectively.

The UK employment rate remained largely unchanged at 75.5%to February 2022.  The unemployment rates and inactivity rates decreased/increased respectively by 0.2%. The increase in economic inactivity was driven by those looking after family or home, retired, or long-term sick. The number of job vacancies grew at a slower rate in January to March 2022 to record of 1,288,000, with the largest increase in human health and social work.

Growth in total pay was 0.4% (due to larger bonuses) whilst regular pay fell on the year at -1.0% in December 2021 to February 2022 in real terms. This means that despite nominal (headline) wage growth of 4.0% (5.4% including bonuses) after the effects of increasing prices for individuals (inflation) workers had less relative income than before. 

To contextualise the inflation figures: the Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 6.2% in the 12 months to March 2022, up from 5.5% in the 12 months to February. In particular this was due to increasing housing and household costs (i.e. from electricity, gas) and transport (i.e. motor fuels and second-hand cars).

The Consumer Prices Index (CPI) rose by 7.0% in the 12 months to March 2022, up from 6.2% in February. Both measures are the UK’s reported inflation metrics however typically CPIH better reflects the inflation impact including housing costs.

From the producers perspective output and input prices grew by 11.9% and 19.2% on the year to March 2022 respectively, up from 11.9% and 15.1% in February 2022, demonstrating the wide-ranging impact of inflation on all participants in the economy.

As per the last update the Bank of England UK Bank Rate is currently 0.75%, however it is possible the Bank of England may increase rates further in the year to curtail rising inflation. 

This post was authored by Chandni Rajput, Executive Committee member of the Young Fabian Economy and Finance Network.

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Sources: ONS, Bank of England. Metrics are correct as of 30 April 2022 unless stated.