UK inflation hit a 30-year high of 5.4% in December, according to new data from the Office for National Statistics (ONS), putting pressure on the Bank of England (BofE) to raise rates more aggressively than planned, experts have said.
The huge consumer prices index (CPI) spike in the final month of 2021 was driven by an increase in the cost of food, following higher commodity prices and supply chain disruptions, as well as from the struggling restaurant and hotel sector.
Elsewhere, prices in the transport sector rose significantly as fuel supplies remained low and staggered car production drove up the cost of second-hand vehicles.
The consumer prices index including owner occupiers’ housing costs (CPIH) rose 4.8% in December as house prices soared. The average house price in the UK now stands at £271,000.
December’s overall inflation figures were stronger than expected, up 0.3 percentage points on the month before and the highest since 1992.
Modupe Adegbembo, G7 economist at AXA Investment Managers, said that inflation was “set to rise further still”, although in the short term, headline CPI should dip from December’s figure.
“Today’s print will increase the pressures on the Bank of England to increase interest rates to quell potential second-round effects of price increases,” he said.
Ben Laidler, global markets strategist at eToro, said the latest data made an interest rate rise next month “inevitable”, a view backed up by Invesco’s global head of asset allocation research Paul Jackson, who said the market had implied a 98% probability of a rate hike in February.
“The BofE has already started to tighten policy and we expect this to continue over the coming months and quarters. We think it will raise its policy rate to at least 1% by the end of 2022 (from the current 0.25%), with more to come thereafter,” said Jackson.
He noted that, taking into context the balance sheet expansion that has taken place during the pandemic, the Bank’s stance was “very accommodative” and that the tightening cycle would take “a number of years”, although it would be more aggressive than the US Federal Reserve’s, or Europe’s ECB.
Yet when the Monetary Policy Committee meets on 3 February, it will not have the output data for December and January, which Adegbembo expected would show the economy contracting.
The Omicron variant of the coronavirus led to falls in economic activity, and there have recently been reports of falling labour market strength, he said, which may suggest the Bank will hold off until there is a clearer picture.
“Given the uncertainty over activity, combined with the fact that the MPC has already taken a first step in raising interest rates, we expect the Bank to follow a more cautious path and leave the rate unchanged at 0.25% in February, pencilling in the next hike only in May,” said Adegbembo.