- British households continue to grapple with high food and energy bills, while workers in a number of sectors have launched mass strikes in recent months.
- The Bank of England has aggressively hiked interest rates to curb inflation and is due to announce its latest monetary policy decision on Thursday.
UK inflation data paints a picture of the UK economy.
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UK inflation unexpectedly jumped in February as food and energy bills continued to rise and put further pressure on households.
The consumer price index (CPI) rose 10.4% annually, ahead of the consensus forecast of 9.9% forecast by economists in a Refinitiv poll and up from 10.1% in January. On a monthly basis, CPI inflation was 1.1%, beating the forecast of 0.6%.
“The largest upward contributors to the monthly change in both CPIH and CPI rates came from restaurants and cafes, groceries and clothing, partially offset by downward contributions from leisure and cultural goods and services (particularly recorded music) and fuels.” That shared that UK Office for National Statistics.
The consumer price index including housing costs for owner-occupiers (CPIH) increased by 9.2% in the 12 months to February 2023, compared to 8.8% in January.
February’s surprise surge marked a break in three straight months of slowing price increases since the 41-year high of 11.1% set in October.
British households continue to grapple with high food and energy bills, while workers in a number of sectors have launched mass strikes in recent months amid disputes over wages and working conditions.
The pound was up 0.4% against the dollar early Wednesday.
Bank of England ‘on a knife edge’
The pressure will be another headache for the Bank of England, which has been aggressively raising interest rates to curb inflation, and is set to announce its latest monetary policy decision on Thursday.
Richard Carter, head of fixed income research at Quilter Cheviot, said inflation’s downward path will not be smooth and hinted that the Bank of England may be forced to raise interest rates above the current 4% level.
“The BoE’s rhetoric will continue to be that inflation is the main concern, but events in the banking sector have taken over somewhat and the policy committee has seen significant disagreement over the best way forward,” he said.
The fallout from the collapse of Silicon Valley Bank and the emergency bailout of Credit Suisse have added even more complexity to the task facing central bankers around the world.
Last week, the independent Office for Budget Responsibility forecast that UK inflation would fall to 2.9% by the end of 2023 – a forecast Carter described as “increasingly ambitious” given Wednesday’s pressure.
“To what extent the banking crisis will have changed this prediction remains to be seen, but it appears to be a very accurate estimate,” he said.
Jake Finney, an economist at PwC, said the reading was the first setback in the Bank of England’s mission since inflation started falling in November, stressing inflationary pressures were starting to diverge.
“Food price inflation continues to hit new highs and restaurant and cafe prices continued to rise, while on the other hand transport price inflation continued its downward trend as gasoline and diesel prices continued to decline,” he said.
Despite the bumps along the way, PwC still expects inflation to ease through most of 2023 to get much closer to the bank’s 2% target. Finney nonetheless noted that “the standard of living pressures are not over yet”.
The OBR expects real disposable household income per person, a measure of living standards, to fall by a cumulative 5.7% in 2022/23 and 2023/24.
“Thursday’s decision by the Bank of England remains in the balance. Recent inflation data is a setback, but the Bank of England has made it clear it is not swayed by monthly changes in data points,” Finney said.
“We expect a final 25 basis point hike from the Bank of England. However, further volatility in financial markets could shift sentiment towards an unchanged decision.”