UK inflation at its highest in 10 years paves way for interest rate hike in weeks

Driven by rising energy and transport costs, the UK consumer price index rose 4.2% in October, official data showed on Wednesday. This is the largest increase in the index since November 2011.

A rapid recovery in demand following the easing of restrictions on Covid-19, shortages of goods and workers and soaring energy costs are pushing up prices around the world. The UK is also feeling the fallout from Brexit, adding to the cost of doing business with the EU, its biggest trading partner.

But October’s inflation data was even higher than analysts expected. The pound rose slightly against the US dollar and hit its highest level against the euro since February 2020, with investors betting on a rise in UK interest rates.

“Surprise on the rise in October inflation data confirms our expectations that the Bank of England will raise the bank rate by 15 basis points to 0.25% at its next Monetary Policy Committee meeting December 16, “wrote Kallum Pickering, senior economist at Berenberg, in a research note.

Higher official interest rates can increase the cost of borrowing for businesses and households, as well as encourage people to save more, thereby reducing some of the inflation.

The Bank of England cuts interest rates to a record low of 0.1% in March 2020 as part of a package of emergency measures to support the economy following the collapse of activity due to the pandemic.

Investors expected the central bank to start raising rates when it met earlier this month. Instead, he chose to stay the course while waiting for more labor market data, fearing unemployment could rise as UK government support for employers wanes.

Some of these employment concerns were likely allayed by news on Tuesday that unemployment in the UK fell to 4.3% in September even as the country’s holiday program ended.

“Combined with yesterday’s decent job market release, the larger than expected jump in CPI inflation in October makes an interest rate hike in December even more likely,” said Paul Dales, UK Chief Economist at Capital Economics.

Inflation is now double the Bank of England’s 2% target, while economic growth is slowing, raising the specter of a period of “stagflation”. The chief economist at the central bank has previously warned that inflation could exceed 5% at the start of 2022.
Transportation costs played a big role in the last peak of inflation. The UK Office for National Statistics said on Wednesday that average petrol prices – which reached an all-time high at the end of last month – jumped 22% during the year through October to 138.6 pence per liter (about $ 8.50 per gallon).

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