As food and fuel costs rise, there is no doubt the poorest are hardest hit | Phillip Inman

Inflation is going to be with us for a few years yet. That’s the growing consensus in the City and among economists who believe the impact of rising fuel prices, the crippling cost of imported goods, and labor shortages in many industries will have a longer legacy than first thought.

Last week all eyes were on rising gas prices and Ofgem’s estimate that the energy price cap will rise by about £800 in October to an average £2,800 per household.

The regulator’s gloomy outlook fueled fears that an even higher figure is coming down the track when the cap is revised in early 2023, such is the momentum propelling gas and electricity prices higher.

This week the focus is on food and how much British food production and the cost of imported produce is pushing up prices in the shops.

Some inflation-watchers have argued that rationing is partly to blame. Jack Monroethe food writer and anti-poverty campaigner, argues cheaper everyday groceries are disappearing from the shelves, leaving hard-pressed families no choice but to buy higher-priced alternatives.

It meant, said Monroe, that inflation for the poorest 20% of people is higher than for everyone else. She is not alone in her assessment.

However, on Monday she came up against the Office for National Statistics, which said it found plenty of low-priced goods in the shops and, according to its own surveys, price rises affecting these goods were no higher than for food generally.

Disentangling Monroe’s food inflation monitor from the basket of pasta, potatoes and sausages used by the ONS is difficult.

What cannot be contested is that the poorest are losing out, whether they are young families or pensioners living solely on the state’s basic retirement income.

The Institute for Fiscal Studies believes the rise in domestic energy prices alone pushed the inflation rate for the poorest tenth of households to as high as 14%, compared with 8% for the richest.

According to the United Nations’ FAO food price index, prices have climbed by about 20% so far this year.

And the huge price shock in the fertilizer market means there is a risk that higher food costs will persist, especially when Russia and Belarus – two historically important sources of fertilizer for the global economy – are subject to sanctions.

Another factor keeping factory-made goods prices high is China imposing draconian lockdowns on manufacturing centers and ports amid outbreaks of Covid-19.

In Britain, Rishi Sunak said his £15bn package of energy support announced last week would not be inflationary, and there was some justification for the statement. Most of the money was targeted at lower-income families, with £650 each for the 8m UK households in receipt of benefits – and they are expected to spend it on escalating energy bills, rather than fueling a renewed splurge in demand for goods and services .

But the parallel £400 subsidy for all bill payers due in October, regardless of income, could be spent on goods from China or the many and varied services afflicted by labor shortages in Britain, where extra demand is only going to push prices upwards.

Policymakers at the Bank of England, fearing that inflation has more legs, could add some extra interest rate rises to their current projection of another 0.5 percentage points this year. This would lift Threadneedle Street’s key base rate above 1.5% by the end of 2022.

Higher interest rates are another form of inflation, just like Sunak’s national insurance increase and freeze on income tax thresholds. They put pressure on employers to increase wages further – adding to costs that feed back into everyday prices, hitting the poor hardest.

No 10 should heed small businesses’ warning

It would be calamitous if 500,000 businesses disappeared under a wave of inflationary costs, as predicted by the Federation of Small Businesses (FSB).

No government would survive such a dramatic collapse in the business community. For this reason, it is likely to be dismissed inside the Treasury as an exaggerated and inflammatory estimate. However, officials would be foolish to dismiss the essence of the argument.

For one thing, many businesses feel they have come to be seen inside government – and in No 10 in particular – as a bottomless well of cash to support the government’s policy agenda.

Minimum wage increases are imposed every year in excess of general wage rises to boost the incomes of the lowest paid. Promises that business rates will be reformed are delayed every year without fail, leaving high-street stores to pay relatively high rates compared with Amazon warehouses. Employers’ national insurance has jumped to more than 15%. Corporation tax will increase from 19% to 25% from next year.

All it will take is for energy costs hitting households to wallop businesses and the FSB prediction will be disturbingly accurate. Many businesses currently have fixed energy deals in place. These will run out later this year, or in 2023. Then there will be trouble.

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