Economy

Inflation out of control in London

London

“They asked me for 400 pounds more a month and to rent new accommodation you have to participate in an auction”, says Paolo Giovanetti, a 30-year-old Sardinian who emigrated to London.

A cucumber costs £2.15. A steak has, on the other hand, gone from 8 pounds to 17. Even fast food restaurants such as Burger King have increased their prices by 11%, while utilities have reached exorbitant figures. “In my 40 square meter apartment, the monthly 

electricity bill has risen from 50 pounds to 129,” says Paolo Giovanetti , a thirty-year-old Sardinian who has lived in London since 2020 and works in a consultancy firm. In the United Kingdom, inflation reached a record level of 10.1% in September, the highest in the last 40 years. As if that weren’t enough, the shortest government in English history, that of former prime minister  Liz Truss,  which lasted just 44 days, almost sank the pound and caused panic in the markets with an unfunded tax cut plan.

Now, after the about-face of the new finance minister, Jeremy Hunt, and entry into no. 10 Downing Street of Conservative Prime Minister  Rishi Sunak, peace seems to have returned to the United Kingdom. But not on the inflation front. 

Rent prices out of control

“London is no longer a city for young workers. You need a salary of at least 35,000 pounds a year to survive,” explains Paolo Giovanetti, who lives in the City with his wife Megan. Price growth in the UK is across the board, but there is one sector where the increases are out of control. “When the contract expired, they asked me for an extra 400 pounds of  rent for the renewal. Before I paid 1,500 pounds, then the landlord asked me for 1,900″, reveals the Sardinian boy. 

“I refused to spend a similar amount for a 40 square meter house – he continues – and I looked for a new apartment with my wife”. In his exact same situation, however, on rentals. “You present an offer in a sealed envelope – says Paolo – and whoever writes the highest sum wins the apartment: I remember that a house went away for 3000 pounds a month, and the starting price was 1900 pounds”.

That’s why living in London has become almost impossible. ” The British are at the limit “, comments Paolo, “many are going into debt to try to hold on. But in two or three months, it will be really difficult to survive because salaries do not increase at the same speed as prices”.

The mixed nature of British inflation

“UK inflation is a mix of EU and US inflation,” explains Peter Goves, fixed income research analyst at  MFS Investment Management. “In the USA – continues the expert – the economy is more robust, but also closed and inflation is generated internally. The economy of the Eurozone , on the other hand, is more open and exposed to fluctuations in supply and demand which affect the price of raw materials and the evolution of exchange rates. The inflationary shock, therefore, is more exogenous and driven by the supply side. And it is for this reason that Europe has been most affected by the crisis energy caused by the war in Ukraine.

United Kingdom, on the other hand, exogenous and endogenous factors coexist: the increase in prices is partly driven by the energy shock and by the exchange rate, but at the same time the labor market is relatively tense, probably due to the reduced supply. This makes the Bank of England’s job very challenging.”

The BoE’s move to fight inflation

To try to tame inflation, the central bank led by  Andrew Bailey  announced the eighth hike in a row, the highest since 1989: +  0.75%  which pushed interest rates to 3%.  It should also not be forgotten that the BoE, when Liz Truss ‘s mini-budget boosted Gilt yields and almost sank British pension funds , immediately intervened to restore calm to the markets. “In recent weeks the Bank of England has increased its credibility – comments Peter Goves -.

Unlike the government, it has acted with consistency and urgency with its targeted and temporary program of government bond purchases. You convinced the markets that you would be able to intervene in the event of further disruption. Furthermore, and this must be underlined, it was one of the first central banks to raise rates: it started before the Fed and it was more gradual”.

The peak is near, but the British remain disheartened 

So far inflation in England hasn’t slowed down. Quite the opposite: even the core annual rate – the one that excludes energy and food, the two types of goods most subject to price increases – rose to a record level of 6.5%. When will the trend reverse? “It depends on the government’s fiscal policies and how much they will affect household budgets by limiting bills – explains the MFS analyst -.

We thought that the cap on utilities would remain in force for two years, while now the new chancellor, Jeremy Hunt ,  shortened the duration to April Then, of course, we will have to take into account the prices of raw materials and gas. But projections from the Bank of England suggest that UK inflation could be close to its peak, although it will be several quarters before it gets under control.” 

A long wait therefore looms for the British people, who seem to have resigned. “All indicators are depressed and consumer confidence is extremely low – reveals Peter Goves -. Inflation is putting a deep downward pressure on  real wages and incomes, and the British are reacting by buying increasingly cheaper products or with similar strategies But there’s more: the contraction in real incomes will continue to weaken consumption and have a negative impact on future economic behaviour”. And as if that weren’t enough, the recession is getting closer and closer: for the BoE, UK GDP will contract until 2024. (All rights reserved)

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