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City warns Bank of England inflation will soar to double its target

Bank of England exterior
Following the figures, Pantheon's Wood said he was "very likely" to shift his call for the first rate cut from August to September.

Inflation in the UK will scale to double the Bank of England’s target, raising fresh questions over the credibility of the Old Lady’s actions, City economists have warned.

A toxic combination of soaring petrol, energy and food costs and restaurants hiking prices after the end of a VAT tax holiday will lift inflation to around four per cent.

The Office for National Statistics (ONS) will verify whether those bets are correct on Wednesday when it publishes its latest estimates for inflation.

Pantheon Macroeconomics expect “October’s consumer prices report to show that CPI inflation jumped to four per cent… slightly above the 3.9 per cent rate anticipated by both the consensus and the MPC.”

Experts at Bank of America think this week’s inflation reading could coax the Bank into hiking rates next month if it is stronger than expected.

“Data this week has the potential to shift our calculus… We look for CPI inflation to jump to 3.9 per cent from 3.1 per cent on utility price hikes,” they said.

The October inflation print is likely to intensify pressure on officials on Threadneedle Street if it confirms experts’ forecasts. 

Weeks ago, the Bank of England decided to leave interest rates at a record low 0.1 per cent despite expecting inflation to hit five per cent in April next year. The Bank has a mandate to stabilise prices by ensuring inflation stays at two per cent.

The Old Lady’s rate setting committee justified the decision by waiting for more evidence on the impact of the end of the furlough scheme on the jobs market. The ONS will also release fresh figures on the labour market tomorrow.

The UK is not the only rich country suffering from a nasty bout of inflation. Price rises in the US are accelerating at their fastest pace since 1990 at 6.2 per cent, while in China, factory inflation is the highest it has been in 26 years.

Severe supply chain breakdowns, compounded by a worldwide energy crunch and the Covid-19 crisis scuppering typical supply capacity has fuelled inflation. 

Sharp changes in spending patterns toward favouring goods has also heaped pressure on supply chains.