Consumer prices in the United Kingdom rose at the fastest annual pace in nearly three decades in January, official data showed Wednesday, heaping more pressure on the costs of living and reinforcing views that the central bank will hike rates for a third consecutive meeting.
The annual rate of consumer price inflation rose to 5.5% in January, the highest since March 1992, when Britain was emerging from a long period of inflation-feeding high wage deals, the Office for National Statistics (ONS) said on Wednesday.
The reading came above expectations from economists in a Reuters poll for it to hold at December’s 5.4%.
Prices have soared globally over the past year, in large part owing to surging energy prices, while consumers are facing also higher food costs as economies reopen from pandemic lockdowns.
“We understand the pressures people are facing with the cost of living,” British Finance Minister Rishi Sunak said in response to Wednesday’s data.
“These are global challenges,” he added.
Earlier this month the Bank of England (BoE) revised up its inflation forecasts to predict inflation will peak at around 7.25% in April, when a 54% rise in regulated household energy bills take effect, squeezing households hard.
“This morning's upside surprise to U.K. inflation serves to underscore a recent global trend: higher and more persistent inflation has caught central banks on the back foot and opened the door to more interest rate hikes this year,” said Ambrose Crofton, global strategist at JPMorgan Asset Management.
As inflation reaches the highest levels in decades, lagging rises to workers’ wages, central banks are deciding on how fast to raise interest rates.
The BoE has already raised interest rates twice since December – lifting rates to 0.5% from 0.1% – and financial markets expect a further rate rise to 0.75% or 1% on March 17 after the BoE’s next meeting.
Two-year British government bond yields hit their highest since 2011 shortly after the data was released.
Financial markets expect BoE interest rates to rise to 2% by the end of 2022, though most economists say they will not get close to that level.
“There will probably then be another hike in May taking interest rates to 1.0%, but we think that's where the (BoE) committee will pause as the inflation outlook becomes more benign,” said Thomas Pugh, an economist at RSM UK.
The latest “increase in CPI inflation... will add a bit more pressure on the Bank of England to continue raising interest rates rapidly,” said Paul Dales, chief U.K. economist at Capital Economics.
The British central bank does not expect inflation to return to its 2% target until early in 2024. The bulk of economists think inflation will fall faster.
Higher energy prices have been the biggest single factor lifting British inflation so far, although global pandemic-related supply-chain problems have raised the price of many other goods too.
Markets expect energy prices to fall sharply next year, and there are some signs of easing global supply chain pressures.
But working-age households are facing their biggest annual disposal income squeeze in 30 years – not least because Prime Minister Boris Johnson’s government plans to put up payroll taxes for workers and businesses in April.
The opposition Labour Party – as well as some Conservative lawmakers – have called on the government to scrap the increase.
Britain is not alone in seeing a surge in the cost of living. The United States consumer price inflation hit a 40-year high of 7.5% in January, while inflation in the eurozone was 5.1%, the highest since the European single currency’s creation.
January’s pick-up in inflation reflected less seasonal discounting by retailers than a year earlier, the ONS said.
“Clothing and footwear pushed inflation up this month and although there were still the traditional price drops, it was the smallest January fall since 1990, with fewer sales than last year,” ONS chief economist Grant Fitzner said.
A record 6.3% annual rise in the prices for clothing and footwear added 0.2 percentage points to the CPI rate, while food and drink prices increased by 4.3%, the most since April 2013.
Petrol prices were lower than December, but are still 23.6% higher than a year earlier, while the cost of second-hand cars was 28.7% higher.
Core inflation, which excludes sometimes volatile prices for energy, food, alcohol and tobacco, rose to 4.4% in January from 4.2% in December, its highest since these records began in 1997.
Retail price inflation - a longer-running series which the ONS says is no longer accurate, but which is used in commercial contracts and to set interest payments for some government bonds - was the highest since March 1991 in January at 7.8%.
Wednesday’s data showed further inflation pressure ahead as manufacturers increased their prices by 9.9% from January last year, the biggest annual jump since September 2008.
Excluding volatile products such as food, tobacco and petroleum products, the 9.3% increase was the biggest since annual comparisons began in 1997.
But the surge in manufacturers' raw material costs slowed slightly, rising by 13.6%, down from 13.8% in December and a peak of more than 15% in November.