INFLATION is expected to hit a ten-year high this year as Islanders already struggling with the cost of living face further price hikes, economic experts have warned.
The Fiscal Policy Panel, which provides independent advice and forecasts to the Treasury Department, has said that the war in Ukraine has further exacerbated pressures on energy prices and will lead to spiralling inflation rates.
The escalating cost of food, energy and property have left thousands of Islanders feeling the pinch.
Jersey’s current inflation rate is 3.8% – the highest level since 2018.
However, in a letter to Treasury Minister Susie Pinel, FPP chair Dame Kate Barker said that ‘inflation is likely to peak at around 5.9% in 2022, which is the highest rate in over ten years’.
Earlier this week, the JEP reported that some Islanders were being forced to go days without eating, with the Salvation Army seeing an increasing number of people accessing its services, including its food banks.
The situation has led to calls from Jersey Consumer Council chair Carl Walker for supermarkets to create larger donation bins for food-bank items and to avoid increasing prices on the council’s list of 14 essential items, which includes bread, milk and eggs.
The JCC has also called on the Chief Minister to introduce a series of temporary measures to ‘help Islanders weather the current storm’.
These suggested measures include giving every household £100 to spend on an energy bill and reducing motor-fuel duty by 9p per litre. However, Deputy Pinel this week told the States that the government had no plans to cut fuel duty.
The latest House Price Index revealed that the average cost of a home rose from £580,000 in 2020 to £673,000 last year – a jump of around £1,788 a week – while average weekly earnings for full-time employees in June stood at £820 per week, a slight rise on the £780 in 2020.
Social Security Minister Judy Martin yesterday announced a new scheme under which 11,000 people who received means-tested benefits would receive an extra £20 per month.
The scheme, which is estimated to cost £2 million, will begin in April and run until the end of the year.
However, when quizzed by Members on whether Islanders would be better off in real terms with the payment once the cost of living was factored in, Deputy Martin was unable to answer.
In updated economic forecasts provided in the FPP’s letter, Dame Kate said: ‘The panel is acutely aware of the challenges of rising global inflation and the economic impacts arising from the tragedy unfolding in Ukraine.
‘The panel’s 2021 annual report stated that “a further significant increase in inflation over the next six to nine months appears highly likely at this stage” and short-term inflationary pressures have increased markedly further since.
‘Supply-chain pressures, largely resulting from the bounce back after the Covid-19 pandemic, have pushed up shipping prices and commodity prices have risen above pre-pandemic levels. This is having a knock-on impact on the cost of living. This has been exacerbated by the Russian invasion of Ukraine, which will continue to impact commodity prices.’
Russia currently supplies around 40% of Europe’s natural gas and 27% of oil imports.
Dame Kate added: ‘Jersey’s headline inflation rate, at 3.8% in December 2021, currently appears low when compared to other nearby jurisdictions with Guernsey, the Isle of Man and the UK all reporting higher inflation in December.
‘However, inflation is likely to rise sharply over the coming year. Inflation forecasts for the UK have been revised upwards on several occasions and the Office for Budgetary Responsibility now expects a peak of 8.7% in 2022, up from 5% expected less than six months ago. In the past, Jersey’s RPI inflation rate has closely tracked UK inflation.
‘While prices in Jersey are likely to increase further into 2022, the rise may be less than in the UK due to differences in Jersey’s energy mix, and the supply impacts affecting different energy sources to varying degrees.’
She added that inflation was likely to peak at 5.9% in 2022 and remain high for the next one to two years before gradually falling to more closely mirror long-term trends.
The Bank of England has increased interest rates from historic lows three times in the past four months in an attempt to slow the rate of inflation and Dame Kate said that further rises were expected this year.
‘The duration of heightened inflation will depend to some extent on the response of wages – though, given the external nature of this price shock, some falls in real wages will be required,’ she added.
She also said that other economic factors, such as unemployment rates and average earnings, showed ‘broadly more positive’ projections than in March 2021. ‘The finance sector’s profits are forecast to be 26% higher this year and a further 36% higher in 2023, which represents a considerable upwards revision from previous forecasts,’ she continued.
‘While the upward revision of economic output is positive and will lead to greater tax revenues, the economic experience of Islanders will likely feel quite different due to rising cost of living, with real earnings falling in most sectors over the next two years.
‘The ongoing situation in Ukraine adds uncertainty to economic conditions, particularly inflation, and consequently interest rates,’ Dame Kate added.
