Businesses are war-gaming for higher inflation

According to The Sunday Times, this worst-case scenario is based on the premise that Russian President Vladimir Putin blocks gas supplies to Europe, food prices soar and inflation expectations become entrenched among the population. 

It also has a scenario in which inflation peaks at just over 10% and then starts to fall back. Matts Persson, a partner at EY-Parthenon and a former Downing Street adviser, said to the outlet that clients were war-gaming for higher inflation. 

He added: “While clearly not the central forecast, firms are now scenario modelling a 15% inflation peak over the winter in the event that Russia turns off the taps and food inflation continues to rise.”

He also said that companies needed to think about cutting loss-making contracts and products, and about trying to be creative with pay deals - such as providing more perks or profit-related pay to keep key staff. 

It comes as consumer price index (CPI) inflation hit a 40-year high, rising to 9.4% in the 12 months up to June 2022 - up from 9.1% in May. This rate has risen sharply over recent months and the June figure was the highest annual CPI inflation rate in the National Statistic series - which began in January 1997. 

In addition to this, the consumer prices index including owner occupiers’ housing costs (CPIH) rose by 8.2% in the 12 months to June 2022 - up from 7.9% in May. The annual rate was below 1.2% from April 2020, at the start of the first Covid-19 lockdown, to March 2021. 

The June 2022 CPIH figure is the highest recorded annual inflation rate in the national statistical series, which began in January 2006. The rate was last higher in the constructed historical estimates in March 1991 - when it stood at 8.3%. 

On a monthly basis, CPIH rose by 0.7% in June 2022 - when compared to a rise of 0.4% in the same month in 2021. The CPI monthly rate, meanwhile, was 0.8% - compared to 0.5% in June 2021. 

The CPIH and CPI monthly rates for June 2022 were the largest rises between May and June since the start of the historically constructed series in 1988.