UK inflation leaps to 10-year high, bolstering rate hike bets

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LONDON (Businesshala) – British inflation rose to a 10-year high last month as household energy bills soared, with the Bank of England raising interest rates next month, according to data on Wednesday.

FILE PHOTO: People shop at market stalls along the skyscrapers of the City of London financial district, amid the coronavirus disease (COVID-19) pandemic, in London, Britain January 15, 2021. Businesshala / Toby Melville / FILE PHOTO

Consumer prices rose 4.2 per cent year-on-year in October, higher than the 3.1 per cent increase in September. Both the BoE and Businesshala surveys of economists – neither of whom had predicted such a big increase – had pointed to a reading of 3.9%.

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“Today’s inflation data will strengthen the Bank of England’s resolve to act,” said Yale Selfin, chief economist at KPMG UK.

The pound climbed to a one-week high against the US dollar and a 21-month high against the euro after the data. [GBP/]

Finance Minister Rishi Sunak said rising inflation was not just a British problem and the government was taking action to stifle spending power, even as it withdraws most of its coronavirus emergency support.

Britain’s inflation rate puts it middle of the pack among G7 countries, with annual US consumer price inflation now running north of 6%.

Household energy bills were the biggest driver of inflation after the Office for National Statistics last month lifted a regulatory cap on bills, with gas prices paid by consumers up 28.1% in October for the year ahead, the Office for National Statistics said.

British energy suppliers are grappling with rising wholesale gas prices, which have led to the collapse of many energy companies, forcing more than 2 million customers to switch providers – often at higher tariffs.

The BoE – which has a target of 2% inflation – has said that higher borrowing costs can do little to affect energy prices. But it is concerned that the high rate of inflation could damage its credibility in the public eye.

Forecasts published by the BoE this month show that inflation is expected to reach around 5% in the coming months.

The BoE is expected to become the first of the world’s major central banks as the coronavirus pandemic batters the global economy, with investors and economists increasingly predicting this will happen on December 16.

On Monday, BoE Governor Andrew Bailey said he was “very uneasy” about the inflation outlook and his vote to keep rates, which stunned financial markets earlier this month, was too close.

On Tuesday, data suggested Britain’s labor market was facing the end of the government’s job-protecting furlough scheme, a major factor for the BoE and its decision on rates.

Robert Alster, chief investment officer at wealth manager Close Brothers Asset Management, cautioned against treating the BoE rate hike next month as a bargain.

“Ultimately, the impact of rising inflation on consumer spending and confidence will be an important measure of stability, and will determine how tough a bank should be,” he said. “We may well see a rate hike in 2022.”

There were signs in Wednesday’s data of inflationary pressure in the pipeline. Prices charged by factories increased more than expected, up 8% compared to October 2020, the sharpest increase since 2011.

The ONS said manufacturers’ input costs have increased by 13%, the highest since 2008.

Reporting by Andy Bruce Editing by William Schomberg and Andrew Heavens

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