U.K. inflation climbs to the highest in 30 years
Britain’s inflation rate surged unexpectedly to the highest since 1992, sharpening a squeeze on households and adding to pressure on the government and Bank of England to respond.
Consumer prices rose 5.4% from a year ago in December, driven by a broad increase in the cost of food, drink, restaurant meals and furniture, the Office for National Statistics said Wednesday. Economists had expected a reading of 5.2%.
Household spending power is weakening, with the price of everyday goods and services rising faster than wages. Policy makers at the central bank are weighing another increase in interest rates as early as next month, and ministers are looking at ways to soften a surge in utility bills due to hit in April.
“Rising inflation means that Britain’s cost of living squeeze will continue to get tighter over the coming months, particularly when energy bills jump in April,” said Jack Leslie, senior economist at the Resolution Foundation think tank. “The drivers of inflation are becoming more broad-based.”
The strength of inflation is fanning speculation of a rapid cycle of tightening for monetary policy. Strong figures from the jobs market on Tuesday reinforced that outlook. The BOE last month delivered the first increase since the start of the pandemic and may move again on Feb. 3.
U.K. government bonds slid, with 10-year yields rising 8 basis points to 1.30%, the highest since early 2019. Money markets have almost fully priced in rate-hike next month.
“I understand the pressures people are facing with the cost of living, and we will continue to listen to people’s concerns as we have done throughout the pandemic,” Chancellor of the Exchequer Rishi Sunak said in a statement.
Pat McFadden, the Labour opposition’s shadow chief secretary to the Treasury, said “the triple whammy of an imminent rise in the energy price cap, real wages falling and Tory tax rises coming down the tracks are going to make this crisis even worse.”
Households are feeling the squeeze not just from rising energy bills, but higher food prices. Energy bills have risen 18.8% for electricity and 28.1% for gas, the biggest increases since 2009. Food prices are now climbing at their fastest rate since July 2008.
“Rising inflation poses tricky questions for the Bank of England,” said Yael Selfin, chief economist at KPMG UK. “Shortages of goods, demand for which rose during the pandemic, and high energy prices have both contributed to quickening the pace of price rises.”
What Bloomberg Economics says…
“The unrelenting surge in U.K. inflation continued in December, surpassing all economists estimates. The peak will probably come in April when a spike in energy prices pushes it near 6.5%. The sight of inflation running ahead of forecasts coupled with a buoyant labor market will almost certainly prompt the Bank of England to raise interest rates next month.”
—Dan Hanson, Bloomberg Economics. Click for the REACT.
The monthly increase was driven by food and non-alcoholic beverages, restaurants and hotels, furniture and household goods, and clothing and footwear. That suggests price gains have moved beyond energy, which is due to hit consumer bills again starting in April.
“Food prices again grew strongly, while increases in furniture and clothing also pushed up annual inflation,” said Grant Fitzner, chief economist for the ONS. “These large rises were slightly offset by petrol prices, which despite being at record levels were stable this month, but rose this time last year.”
The retail price index, used to set payouts on gilts and for pricing public services including train fares, surged 7.5% from a year ago, the most since 1991. That’s more than the 7.1% pace that economists had expected.
In one encouraging sign, pipeline price pressures appeared to ease in December. The cost of fuel and raw materials used by factories unexpectedly fell, and prices charged rose less than forecast.
Core CPI, which excludes energy, food and other volatile items, accelerated to 4.2%, the highest since 1992.
Inflation averaged 4.9% in the fourth quarter, higher than 4.3% forecast by the Bank of England. For December alone, the BOE had predicted a rate of 4.5%.
“We’ve not seen the end of rising inflation yet,” said Alpesh Paleja, lead economist at the CBI, Britain’s biggest employers group. “With prices on the rise and real wages already falling, it’s likely households will face a cost-of-living crunch.”
—With assistance from Greg Ritchie, Alex Morales and Harumi Ichikura.
Never miss a story: Follow your favorite topics and authors to get a personalized email with the journalism that matters most to you.