UK Inflation Jump to 4.2% Piles Rate Hike Pressure on Bank of England

UK inflation came in at 4.2% year on year for October, above the 3.8% forecast by economists.

September Consumer Price Index inflation was 3.1%, slightly down on the previous month, so October’s data represents a steep rise. Inflation is racing ahead at it fastest pace since November 2011.

The latest figures add to the fears that inflation may not be as transitory as the Bank of England hopes. Fuel and energy costs are leading the price increases but housing, transport and furniture and households goods saw their highest rates of increase in more than two years, according to the Office for National Statistics (ONS).

Removal of the price cap on household energy prices are reflected in the latest inflation data, with used car sales, fuel costs and prices also ticking higher in hospitality, all adding to the upward trajectory of prices.

There is as yet no sign that inflation is leading to a general bidding up of wage rates, outside of pinch points relating to supply chain bottlenecks such as heavy goods vehicle drivers.

Consumer Price Index core inflation for October was 3.4% compared to 2.9% in September.

Bank of England policymakers will now be under heightened pressure to raise interest rates, which it passed on doing at its last monetary policy committee meeting, arguably confusing the market and risking its credibility.

Unemployment rate drop to 4.3% may signal time for interest rate rise

The Bank said it wanted to see more visibility on how the ending of the furlough scheme would impact employment. On that score, data released yesterday showed unemployment falling more than expected to 4.3% year on year for September from  4.5% in the previous month.

The ONS reported that the Retail Price Index has risen to 6.0% – this differs from CPI in that it measures the variation in prices of retail purchases of consumers as opposed to the average price of the total weighted economic output purchased. Many pay claim negotiations are based on the RPI figure.

Reacting to the consumer inflation data, the pound has firmed on against the US dollar and the euro on forex markets.

But the timing of rate rises is not straightforward given the slowing GDP growth and continuing uncertainties concerning the Covid pandemic, with the prime minister just yesterday saying he could rule out a lockdown at some point this winter.

UK inflation: GDP growth headwinds complicate timing of rates increases

Suren Thiru, head of economics at the British Chambers of Commerce, commenting on the Uk inflation figures said: “The Bank of England are facing a tricky trade-off between surging inflation and a stalling recovery. However, with the UK economy facing mounting headwinds, raising interest rates too early should be resisted.”

Chancellor Rishi Sunak in a statement said: “Many countries are experiencing higher inflation as we recover from Covid, and we know people are facing pressures with the cost of living. We’re helping people get into work.”

However, Yael Selfin, chief economist at KPMG UK, thinks the chances of interests rates moving higher on 16 December (the next MOC meeting) are now much higher. “Confirmation that inflation is moving further away from its 2 per cent target may seal the Bank of England’s resolve to raise rates in December, following the strong labour data released this week,” said Selfin.

The Bank of England sees inflation peaking at 4.5% in April 2022, although other forecasts predict the rate reaching as high as 6.0%

Producer prices are also on the rise, up 13% in October compared to 11.4 in the previous month.

Inflation in the US has hit a 30-year high at 6.2% and eurozone inflation data due later today is likely to show a jump in price rises.