Government on a 'war footing' as inflation soars to a 40-year high in deepening cost of living crisis

Increased food costs were the biggest driver of the latest hike, according to the ONS, with annual inflation for these items now running at 12.7%, up from 9.8% in June, fuelled largely by price rises for basics such as bread, milk, cheese and eggs.

July's inflation rate is higher than the 9.8% figure expected by most economists and represents a further hit to household budgets.

It is the biggest jump in the cost of living since February 1982, when CPI reached 10.4%, according to ONS estimates.

Cabinet minister Kit Malthouse says government is on a "war footing" so that the new prime minister “is able to make quick decisions” on how to tackle the cost of living crisis.

Data shows that the annual motor fuels inflation rate alone has soared since May, 2020 when prices dropped by 17%. Now it has rocketed by 44%.

Inflation is expected to continue rising this year, with the Bank of England predicting it will not drop to a target  of 2% for about two years.

Citizens Advice Scotland's  financial health spokesman Myles Fitt said government intervention was required to help people through the crisis.

“The fact that this increase is driven by a rise in food prices means that many of those most affected are those who were on the lowest incomes to start with. Large numbers of people are struggling just to put food on the table and put the heating on.

"This is not normal, and it needs a better than normal response.”

Rocio Concha, director of policy and advocacy for the consumer organisation Which added: “These figures underline the scale of the cost of living crisis and make clear that millions of people face a dire financial situation in the months ahead. With bills set to rise further, it’s clear that the current level of cost-of-living government help will not be sufficient," she said.

“Ministers must now move quickly to increase the amount of support for those who are struggling, and businesses in essential sectors, such as supermarkets, energy and telecoms, must also do everything they can to make sure customers are getting a good deal and extra support if they need it.”

Inflation is expected to fall back a little in August; however, according to estimates it could soar to 13.3% in October when the energy price cap rises again. The Bank of England believes this could push the UK into a recession and it has been raising interest rates to try to get inflation down.

This increases the cost of borrowing and encourages people to borrow and spend less.

Meanwhile energy prices are expected to rise even further with multiple analysts predicting the bills cap set by market regulator Ofgem would rise from £1971 to £3600.

On Wednesday energy consultancy Auxilione said that at today’s prices the cap might rise to £4,722 in January before hitting £5,601 in April.

Unions have warned that the cost of living crisis has become a "living nightmare".

TUC general secretary Frances O’Grady said: "Families are facing a cost-of-living emergency. Ministers must cancel the catastrophic rise to energy bills this autumn, and to reduce future inflationary pressures and make energy more affordable, they should bring energy retail into public ownership."

Unite general secretary Sharon Graham said inflation has reached “new perilous levels” for workers and their families.

"Yesterday, real wages fell to the lowest on record, So if today’s figures prove anything it’s that wages are not driving inflation," she said.

And the assistant general secretary of the public services union Unison Jon Richards said: "The cost-of-living crisis has become a living nightmare for millions of working people.

"Wages are slumping at a record rate while prices and bills shoot up. But the government and those angling to be the next Prime Minister appear indifferent to the plight of those struggling to make ends meet."

SNP shadow Chancellor Alison Thewliss MP said: "It's utterly shameful that the Tory government is nowhere to be seen while families are worried sick about rising bills and inflation soaring to levels not seen since Margaret Thatcher.

"People need help right now. The Prime Minister and Chancellor must come out of hiding, recall parliament and introduce an emergency budget that freezes the energy price cap, scraps VAT on fuel and delivers meaningful financial support for households.

"With every day the UK government fails to act, it is demonstrating the need for Scotland to become an independent country, with the full powers and levers needed to support families and escape the damage of Westminster control."

Chancellor Nadhim Zahawi said getting inflation under control is his "top priority".

"I understand that times are tough, and people are worried about increases in prices that countries around the world are facing," he says.

"Although there are no easy solutions, we are helping where we can through a £37bn support package, with further payments for those on the lowest incomes, pensioners and the disabled, and £400 off energy bills for everyone in the coming months."

But Boris Johnson's spokesman has said no further interventions will be forthcoming before September 5 when either Rishi Sunak or Liz Truss will become the new prime minister.

That is despite Labour leader Sir Keir Starmer having put come up with his own "radical" package of measures he says would help families cope this winter.

Lord Rose, the chairman of Asda and former boss of Marks & Spencer, has advocated “targeted action” for “those who need it most”. He stressed that inflation must be “killed” because it’s “pernicious” and “erodes wealth over time”.

ONS chief economist Grant Fitzner said: “A wide range of price rises drove inflation up again this month.

“Food prices rose notably, particularly bakery products, dairy, meat and vegetables, which was also reflected in higher takeaway prices.

“Price rises in other staple items, such as pet food, toilet rolls, toothbrushes and deodorants, also pushed up inflation in July.

“Driven by higher demand, the price for package holidays rose, after falling at the same time last year, while air fares also increased.

“The cost of both raw materials and goods leaving factories continued to rise, driven by the price of metals and food respectively.”

Labour shadow chancellor Rachel Reeves said: “We must get a grip on rising inflation leaving families worried sick about making ends meet.

“Labour’s fully-costed plan to freeze the energy price cap will bring inflation down this winter, easing the burden on households and businesses.

“It will mean that households won’t pay a penny more for their energy bills this winter.

“People are worried sick and while the Tories are busy fighting and ignoring the scale of this crisis, only Labour can give Britain the fresh start it needs.”

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 8.8% in July, up from 8.2%.

Businesses are also facing pressure from soaring prices, said Alex Veitch, director of policy and public affairs at the British Chambers of Commerce.

Producer price inflation reached 22.6% in July, among the highest levels since records began.

“The difference between input and output inflation illustrates that many firms are absorbing as much of these additional costs as they can,” Mr Veitch said.

“There is a limit to how much additional cost firms can absorb and is limiting growth and investment.”

He called for the Government to support companies by reviewing the shortage occupations list to help fill more than one million vacancies, and slashing VAT on companies’ energy bills from 20% to 5% in line with the tax that households pay.