A person shopping at Australian grocery store, with a basket full of sparkling water, fruits and vegetables.

UK inflation has hit 40-year high – and we’re going to feel it in Australia

Another major economy has just recorded a large rise in inflation — an important measure of the cost of living.

The UK consumer price index (CPI) up 9.1 percent in the 12 months to May 2022, up 9 percent in April.

UK inflation is now at its highest point in 40 years.

Over the year to May, the CPI rose 7.9 percent.

Gas, electricity bills are major contributors to UK inflation

According to the Office for National Statistics, the items in the “basket,” or collection of goods and services, that make up the CPI that contributed most to the overall rise in the index were gas and electricity bills, as well as gasoline.

In the UK, motor fuel is one of the biggest contributors to record inflation. Pexels: lifeofpix

In early June, financial markets collapsed after news that US inflation had also reached a 40-year high.

The hike raised concerns that the US Federal Reserve – the equivalent of the Australian Reserve Bank – would need to raise interest rates sharply to cool demand in the economy and bring inflation under control.

Those fears became reality on June 15, when the Federal Reserve raised its benchmark interest rate by the highest amount since 1994.

Unlike in Australia, wage growth in the US plays a role in the inflation picture.

But the war in Ukraine and the supply restrictions caused by the pandemic are the biggest culprits.

That’s because it costs companies more to secure inventories and supplies and they pass those costs on to customers.

What about Australia?

But Australia is also suffering from this inflationary pressure.

Reserve Bank governor Philip Lowe said yesterday that while much of the rise in inflation was fueled by foreign factors such as the war in Ukraine and the pandemic, it was increasingly generated locally.

One of the biggest increases in the cost of living domestically has been the result of the energy crisis on the east coast.

A large power station with two high concrete chimneys surrounded by transmission lines and a lake.
High energy prices are likely to continue.Supplied: AGL

Outdated coal-fired power stations fail, making it difficult for power generators to reliably supply power.

The energy producers are making efforts to solve the problems with their plants, but the parts needed to repair them are not always readily available due to shortages.

That has wreaked havoc on the spot market for wholesale electricity in recent weeks.

The spot market is where power producers and retailers meet to help determine the price households pay for power by assessing the supply and demand of power available to customers.

The market operator, AEMO, stepped in last week and took control of the market.

Since then, the market has stabilised, leading to the gradual withdrawal of the AEMO, giving the companies the ability to calculate the prices they charge for themselves.

Expect energy bills to rise

However, power supply remains a major problem and is likely to lead to further increases in energy bills.

Medium-term solutions, including the capacity mechanism that the government is currently working on, could help secure some of the power supply, but could drive up energy prices further.

The AEMO reserve capacity mechanism recently announced by the federal government will ensure that gas retailers — the ones that are on your utility bill — pay for the power generators to keep gas in reserve for when there is another emergency.

Analysts say retailers will pass those costs on to customers, resulting in higher utility bills.

Tony Wood of the Grattan Institute
Tony Wood says Australians will pay more for reliable power. Delivered: Grattan Institute

“And as a result, that insurance is something we as consumers will all pay for because we’re getting reliable power,” said Tony Wood, energy and climate change program director at the Grattan Institute.

Treasurer Jim Chalmers warned Australian households that the cost of living would rise before it got better.

Australian inflation, or CPI, is currently 5.1 percent.

The next CPI will be released by the Statistical Office on July 27 this year.

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