Pegging Inflation – Has the Cost-of-Living Crisis Now Peaked?

Prior to Liz Truss’s election as Tory leader earlier this month, the Bank of England (BoE) had forecast that inflation in the UK would peak above 13% and 18% in October and November respectively.

The new Prime Minister’s pledge to freeze energy prices and subsequent package of support will help to ward such peaks, however, with the BoE chairman now suggesting that inflation won’t move above the 13%-mark previous forecast.

However, the economic climate remains uncertain, while there are other factors contributing to inflation. We’ll appraise these below, while asking whether the cost-of-living crisis in the UK has already peaked.

Then and Now – Inflation in the UK

Inflation has risen steadily through 2022, after continued issues in the supply chain and the fallout from the coronavirus pandemic sent consumer prices soaring in Q4 2021.

Then came the war in Ukraine, with Russia launching a full-scale offensive in February and directly impacting the global balance between the supply and demand of oil.

More specifically, the supply of oil from Russia (which supplies much of mainland Europe) has been hit by military strikes and global sanctions, while demand has continued to peak as economic activity has largely returned to normal after a series of coronavirus lockdowns.

This saw inflation peak at 10.1% in July (the highest such reading in 40 years), before depreciating nominally to 9.9% the following month.

August also saw the first such depreciation in 11 months, as inflation arguably began to ease amid talk of a financial package of support and a significant depreciation in the price of motor fuels.

However, it should be noted that the cost of food and clothing rose at a higher rate in August, highlighting that inflation remains an issue for some essential goods and may continue indefinitely for the foreseeable future.

Has Inflation Peaked?

Given Liz Truss’s economic intervention and the fact that overall inflation declined slightly in August (alongside the BoE’s recent forecast), it could be that the cost-of-living crisis has already peaked in the UK.

However, the cost of food and wholesale energy remain disproportionately high, while it should also be noted that a potential cut in inflation must be measured against the broader range of forecasts that were issued in August.

While the BoE forecast an inflation peak of 18.6% in the New Year, for example, Goldman Sachs suggested that it could actually rise above 22%. Regardless, inflation will remain an issue for the foreseeable future at least, with the only debate being the extent of this impact in the UK.

This is especially true when you consider that ongoing Brexit complications and the fallout from Covid-19 are also contributing to price hikes, particularly as the supply chain continues to be squeezed across the board.

On a final note, interest rate hikes are expected to continue in the UK, as the BoE maintain its own policy of supressing inflation. In fact, CFD traders are pre-empting this and already hedging against the pound, as they look to profit from the central bank’s monetary policy.

This could also hinder economic growth and recovery, however, especially in terms of consumer spending and the rising cost of borrowing.