UK Inflation Climbs to 5.1% as BoE Inaction Risks Market Credibility
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UK inflation has surged to 5.1%, outstripping all forecasts, with the Bank of England not expecting it to reach those levels until Q2 2022.
Consumer inflation is now at its highest level in a decade, piling pressure on the central bank to act to take control of inflation.
Pushing up inflation are usual suspects petrol prices and second-hand cars but the key takeaway is that price rises are broadening out across the economy. Clothing and food prices both saw substantial price increases, according to the Office for National Statistics.
Economists had predicted UK inflation would rise from 4.2% in October to 4.8% in November.
UK labour market continues to tighten – unemployment falls to 4.2%
Adding to fears of a policy misstep by the UK central bank, unemployment fell to 4.2% and employment topped 75.5%. The extent of the tightening labour market is shown in the level of vacancies which reached a new record for the three months to November of 1.2 million.
Wages are also beginning to rise in line with inflation. Total pay in the three months to October grew 4.9%.
And in April 2022 the price cap on consumer energy prices will be adjusted to take account of higher prices for gas and electricity, which will add fuel to the inflation fire.
The latest price figures come a day before the BoE has to make a decision on whether to start raising interest rates. Just yesterday the IMF urged the bank to move on rates lest it fall prey to “inaction bias”.
The bank is caught between fears of inflation becoming embedded in the UK economy and the risk of tightening monetary policy to severely and quickly in a way that could choke off the economic recovery.
UK inflation: omicron shock may add to price rises not reduce them
However, that line of thinking may overlook the fact that inflation has taken root precisely in a period when economic activity suffered an unprecedented demand and supply shock – in other words the pandemic has encouraged inflation, so there is no reason to expect the omicron variant to produce a result that tames inflation.
But policymakers will also be concerned that they could end up reaching for levers that have no impact on price rises, given that supply and labour shortages, for example, are unlikely to be improved by central banks hiking interest rates.
US Producer prices rocket 9.6% in 3 months to November
Yesterday producer prices in the US for November rose by the largest since records began, by 9.6% year on year and 0.8% on the previous month. Core PPI was up 7%.
Producer prices will feed through into consumer prices.
A similar picture is apparent in the UK , where manufacturers increased prices by 9.1% in November, year on year. Manufacturers’ input prices are soaring, up by 14.3% in November on this time last year.
GBP/USD is 0.2% higher at 1.3255 as traders reinstate bets that may have been dialled back in the face of omicron, that the BoE will have to raise rates sooner rather than later.
Today is a big day for the markets on the c=economic news front. The federal Open Market Committee statement is due at 20:00 CET and a press conference by Fed chair Jerome Powell following half an hour after.