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Inflation set to surge this autumn as Brexit and Covid combine

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Consumers have been warned of an autumn rise in living costs from sharp increases in household energy bills and food prices, as Covid and Brexit disruption ripple through the economy.

Sounding the alarm for a wide range of products and services going up in price, business leaders said the UK was facing a “perfect storm” of worker shortages and problems with global supply chains that would lead to a burst of inflation within months.

The warning over the cost of living comes as millions of households face a drop in their income as the government prepares to cut universal credit by £20 a week from 6 October and close the furlough wage subsidy scheme, in moves charities warn will push more people into poverty.

Rebecca McDonald, senior economist at the Joseph Rowntree Foundation, said: “Millions of families are facing mounting stress and anxiety about how they will cover the cost of living as the planned cut to universal credit rapidly approaches.

“It is indefensible for ministers to be planning to cut universal credit at a time when families who are already struggling to make ends meet will see rises in their energy bills and items on the shelves getting more expensive.”

Darren Labbett, the managing director of Woods Foodservice, a wholesaler that supplies the pub and restaurant trade, said the industry was doing all it could to mitigate rising costs. However, a “perfect storm” for businesses would force consumer prices to rise.

manufacturers’ costs graphic

“We, as well as the rest of the supply chain, can’t absorb those price increases forever,” he told BBC Radio 4. “Vegetable oil is at its highest price now for over 30 years.”

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The cost of products such as tomatoes has almost doubled in the past year, while consumer goods makers such as Nestle, Procter & Gamble and Unilever have warned they will be forced to hike their prices. UK shop prices rose last month, with retailers warning the cost of filling up the trolley will climb further if disruption continues.

It comes as the food industry reports a widespread lack of staff – including fruit and vegetable pickers, meat processors and HGV drivers – a shortage that has been exacerbated by Covid-19 and Brexit.

Households are also braced for the biggest rise in their energy bills for a decade from the start of October when Ofgem, the energy market regulator, will raise its price cap imposed on suppliers in response to soaring global energy prices.

As many as 15 million customers protected by the price cap could see a rise in their bills, with those on default tariffs paying by direct debit expected to see a rise of up to £139, from £1,138 to £1,277. Prepayment customers will see an increase of up to £153, from £1,156 to £1,309.

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Gas prices

Gas prices have soared to a record high as the world economy emerges from lockdown, lifting energy demand. Reserves in storage facilities across Europe have dwindled to record lows after a prolonged winter across the continent drained supplies, while demand is also rising as countries prioritise the use of gas over coal because of its lower carbon emissions.

Wholesale electricity prices in the UK soared to a record high last month, stoking concern that more families would be pushed into fuel poverty this winter.

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Shortages of raw materials and of workers, as well as booming demand after the world economy reopened from coronavirus lockdowns earlier this year, have driven up costs for British manufacturers to the highest point since the 1990s.

Factories in Asia have been forced to cut production because of shortages of computer microchips and elevated coronavirus infections, while plants across Europe have also been disrupted.

The cost of sending and receiving goods has also risen sharply, with firms struggling with global disruption linked to Covid and issues in the UK from Brexit. The Baltic dry index, the shipping industry’s bellwether, which measures the average prices paid for the transport of dry bulk materials across more than 20 routes, has soared to a 10-year high in recent weeks.

Global shipping

According to the Office for National Statistics, factory input prices surged by 9.9% in the year to July, driven up by the cost of metals and machinery, as well as wood, energy supplies and chemicals.

Much of the impact on consumers will, however, depend on how far companies are willing to pass on higher costs, with manufacturers, wholesales and retailers needing to weigh up the risk that higher prices could reduce sales volumes.

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In one signal of consumer pricing power, Reckitt Benckiser, the maker of household products including Durex and Dettol, said in July that it was “simply not possible” to hike its prices, in the short term at least, despite rising costs for chemicals, plastics and freight.

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Despite elevated demand for supermarket goods and supply chain disruption, food prices have fallen by 0.5% in the year to July during the Covid pandemic, according to the ONS.

The Bank of England expects inflation to peak this year close to 4%, before falling back towards its 2% target rate as Covid disruption recedes. However, retailers warn prices are likely to rise soon.