Britain suffers worst inflation in G7 as price surge hits 40-year high

Sharply higher price rises could force the Bank of England to raise interest rates even more quickly to stamp out inflation, despite a looming recession. Photo/123RF

Britain is suffering the worst inflation crisis of any G7 country after prices surged at their fastest rate in 40 years.

Consumer prices rose 10.1 per cent in the year to July, the biggest leap since 1982 and a higher rate than in America or the major eurozone countries.

The increase – driven especially by rises in the cost of food including butter, milk and olive oil – will pile more pressure on consumers already facing the steepest real pay cut on record, and comes ahead of another jump in energy bills this winter.

Commuters face a record increase in rail fares, despite months of strikes. Workers are walking out again on Thursday.

On Wednesday night Liz Truss pledged to combat inflation if she becomes Prime Minister by tackling "economic orthodoxy".

A spokesman for her leadership campaign said: "As Prime Minister, Liz would use an emergency budget to kickstart her plan to get our economy growing and put more money into the pockets of hardworking people.

"You cannot tax your way to growth, and business as usual will not do. We need a new approach to the economy, we need to challenge the failing economic orthodoxy and we need to deliver the necessary reform to tackle inflation and achieve sustainable growth."

However, earlier at a hustings, potential leadership rival Rishi Sunak said Truss' plans would fuel inflation and added: "What I will not do is pursue policies that risk making inflation far worse and lasting far longer."

Martin Beck, chief economic adviser to the EY Item Club, said the UK is facing a combination of the pressures in America and those in the eurozone, resulting in higher inflation than either.

He said: "We have got the US' excess demand for workers and the Europeans' massive energy bill issues, so we have got the worst of both worlds when it comes to inflation.

"Different countries have different policies in place when it comes to holding down energy bills. The UK approach is more to give households direct support, like cash, when countries like France have done more in holding bills down directly."

At the same time, the UK is more exposed to imported inflation. A weaker currency pushes up the price of imports, and both the euro and the pound have fallen against the dollar in recent months. But Britain's economy is more trade-intensive, leading to higher inflation.

Mr Beck said: "The exchange rate has a bigger effect on UK inflation than it does in the eurozone, as imports are a bigger share of the economy."

American and German inflation stands at 8.5 per cent, while Italy's rate is 8.4 per cent, with Canada on 7.6 per cent, France on 6.8 per cent, and Japan on 2.4 per cent.

The latest jump in UK inflation was driven by a fresh increase in food and drink prices, which are 12.7 per cent higher than a year before. Shoppers are paying an average of 28 per cent more for milk, and 24 per cent for pasta.

Filling up the car cost 43 per cent more than it did a year ago, with the average litre of petrol selling for £1.91 (NZ$3.66) in July.

The sharply higher price rises are likely to force the Bank of England to raise interest rates even more quickly to stamp out inflation, despite a looming recession.

Shoppers in the UK are paying an average of 24 per cent more for pasta than they were a year ago. Photo / Supplied

Prices are rising significantly faster than earnings, meaning households are becoming worse off in real terms.

Figures released on Tuesday show that real terms pay was 4.1 per cent lower in the three months to June than in the same period of 2021.

The Bank has warned inflation is likely to peak at 13 per cent later this year following another increase in the Ofgem energy price cap.

The Resolution Foundation think tank said the new PM would need to take action over soaring costs.

James Smith, its research director, said: "It will take many months, and much more living standards pain, before inflation starts to ease. So, the number one priority for the next Prime Minister will be to offer significant support to help millions of families through a brutal winter and beyond."

Meanwhile, rail passengers facing fresh strike action on Thursday face the sharpest fare hikes ever after retail price inflation surged to a new 41-year record.

The Government has insisted it will intervene after the 12-month change in the retail price index – an outmoded measure used to determine the annual increase in ticket prices – hit 12.3 per cent, the fastest since 1981.

Fares typically increase each year on the basis of July's RPI inflation plus 1per cent, but the Department for Transport (DfT) has said it will take "decisive action" to shield commuters.

Whitehall sources insisted on Wednesday night that a double-digit increase would be avoided, but said the decision would be left to the next PM.

DfT declined to comment on what measure is now being considered.

Any increase is likely to shatter the previous record rise of 5.9 per cent in 2009, piling more pressure on families already being squeezed by the worst inflation in a generation. Rail fares have been regulated since privatisation in 1993.

Based on the current system and figures released by the Office for National Statistics on Wednesday, this would increase the cost of an annual season ticket from Brighton to London by over £600 to £5,075.

The Campaign for Better Transport charity said ministers had to respond to the "mega" RPI rise.

Paul Tuohy, its chief executive, said: "Even a minus RPI rail fare rise next year will hit passengers hard and could mean people stay away from the trains altogether.

"The Government must go further and commit to a fare freeze for 2023 now so that commuters are not left with the uncertainty of where they'll be able to afford to get to work next year."

It comes amid a new wave of strikes, which have already caused chaos across Britain's railways this summer.

Just one in five trains are expected to run on Thursday amid a walkout by members of the Rail, Maritime and Transport union.

A further walkout is scheduled to take place on Saturday, with disruption expected on Friday and Sunday as a result.

Data released earlier this week showed 2022 has been the worst year on record for train reliability, with nearly one in 25 services cancelled.

Ms Truss faced criticism on Wednesday after she was revealed to have said British workers needed "more graft" and did not have the "skill and application" of foreigners.

Labour said the comments, made in leaked audio acquired by the Guardian, were "offensive". Mr Truss's campaign said the comments lacked context.

-By Louis Ashworth, Tim Wallace and Robert Mendick