Thu, Feb 17, 2022 page10

• UK inflation overshoot adds to cost of living squeeze

  • Bloomberg
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  UK inflation unexpectedly accelerated for a fourth straight month last month, a surprise that highlights a brutal cost of living crisis that is only set to worsen this year.

  Annual price growth rose to 5.5 percent, a new 30-year high, driven by clothing and footwear, the British Office for National Statistics said yesterday.

  Economists and the Bank of England (BOE) had expected inflation to remain unchanged at 5.4 percent.

  An index that excludes volatile items quickened to a record 4.4 percent.

  The figures raise the stakes for the BOE, with investors not ruling out a 50 basis point interest rate increase next month, an unprecedented move since it gained independence in 1997.

  The central bank is predicting inflation to peak at about 7.25 percent in April — more than triple its target — when a 54 percent surge in energy bills is due to take effect at the same time as taxes go up.

  By contrast, wages are increasing at less than 4 percent.

  Inflation, which has surged from just 0.4 percent a year earlier, has overshot forecasts in seven out of the past nine months. In response, current market pricing suggests interest rates would increase from 0.5 percent to 2 percent this year — the highest since before the global financial crisis.

  KPMG UK chief economist Yael Selfin said that she expects inflation to “hit households hard” as the effect of the increase in energy tariffs takes effect.

  “The Bank of England has signaled a determination to get ahead of the curve on inflation. In the short run, this will add to the squeeze on incomes as lenders pass on the rate increase to borrowers,” she said.

  “The question of whether to hike at the March meeting has been profoundly answered by the recent run of data releases — the more pressing issue now is whether there is a case to tighten by more the 25 basis points. Our baseline remains the BOE moves in a 25 basis point increment, but a 50 basis point rise can’t be ruled out,” Bloomberg Economics senior UK economist Dan Hanson said.

  The pound gained after the data were released, while government bonds fell, with the yield on the UK’s 10-year securities rising 2 basis points to 1.599 percent.

  Clothing and footwear prices fell less sharply than they did in January last year when the country was in lockdown. Retailers traditionally cut prices in January, and the 2.9 percent fall this year was the smallest since records began in 2005. Furniture and households goods also contributed to the pickup in inflation.

  Downward pressure on inflation came from restaurants, hotels and transport, with auto fuel prices falling on the month, the Office for National Statistics said.

  Overall, consumer prices fell 0.1 percent on the month, the smallest decline for any January since 2011.

  Retail price inflation, which determines payments on index-linked government bonds among other things, accelerated to 7.8 percent, the most since early 1991.

  “We understand the pressures people are facing with the cost of living,” British Chancellor of the Exchequer Rishi Sunak said in a statement.

  The government was responding by providing millions of households with up to ￡350 (US$474.82) each to help with rising energy bills, he said.

  Separate figures showed pipeline cost pressures continuing to build last month.

  Fuel and raw material costs rose 0.9 percent following a steep rise in oil prices due to the risk of conflict between Russia and Ukraine. In response, producers raised their own prices by 1.2 percent, four times the increase in December last year.
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