Bank of England to hike interest rates to five per cent after inflation tops forecasts to stay in double digits
UK inflation has smashed expectations to stick in the double digits, in a sign that the cost of living crisis is still gripping families and businesses across the country, prompting markets to bet the Bank of England will hike interest rates to five per cent.
The rate of price increases trimmed to 10.1 per cent last month, down from a shock rise to 10.4 per cent in February, according to the consumer price index released today by the Office for National Statistics (ONS).
The number was above the City’s expectations of a fall to 9.8 per cent.
March’s inflation rate was held high by rapidly increasing food prices, which jumped more than 19 per cent, the fastest acceleration since the 1970s.
“Inflation eased slightly in March, but remains at a high level,” Grant Fitzner, chief economist at the ONS, said.
“The main drivers of the decline were motor fuel prices and heating oil costs, both of which fell after sharp rises at the same time last year. Clothing, furniture and household goods prices increased, but more slowly than a year ago.”
“However, these were partially offset by the cost of food, which is still climbing steeply, with bread and cereal price inflation at a record high,” he added.
Worryingly, strong price pressures hidden within the numbers remain, with the rate of core inflation – which strips out food and energy price movements and is seen as a more accurate measure of price tension – still pretty high.
It was unchanged at 6.2 per cent annually in March and hit 0.9 per cent on a monthly basis.
Britain also has the highest inflation headline inflation rate among its peers.
UK inflation has raged for more than a year
“Inflation continues to ease but the underlying momentum remains sticky,” Yael Selfin, chief economist at KPMG UK, said.
Bank of England officials have stressed they need to see a reduction in underlying core inflation before feeling comfortable to stop hiking interest rates.
The overshoot will likely tip the balance in favour of Governor Andrew Bailey and co lifting borrowing costs another 25 basis points to a post financial crisis high of 4.5 per cent.
“The drop is too modest for the [monetary policy committee] to stop raising rates; we now look for a final 25 basis point hike in May,” Samuel Tombs, chief UK economist at consultancy Pantheon Macroeconomics, said.
Others agreed with Tombs, who for months said rates had peaked after the Bank’s last hike.
“To address the underlying issues the MPC still needs to raise rates again when it meets in a few weeks’ time,” Kitty Ussher, chief economist at the business lobby group the Institute of Directors, said.
In fact, markets now reckon Bailey and co will bump rates to peak of around five per cent, levels last seen in the weeks after Liz Truss’s haphazard mini budget when debt markets were rocked by her £45bn of unfunded tax cuts.
Experts still think inflation will fall quickly this year due to big reduction in global energy prices after they surged to record highs following Russia’s invasion of Ukraine.
Interest rates have climbed sharply to tame price rises
Britain is suffering from a “terms of trade shock,” which means it is paying vastly more to import products, pushing up inflation.
But the ONS’s figures illustrated some of that imported inflation is feeding through to domestic price pressures, which tends to be harder for policymakers to reduce.
Services inflation held steady at 6.6 per cent last month, while goods prices increased nearly 13 per cent.
Inflation is wiping out Brits’ living standards at a historic pace. Numbers from the ONS yesterday showed real wages fell 4.1 per cent and calculations from the economic think tank the National Institute for Economic and Social Research put households on course for a massive spending power hit.
Chancellor Jeremy Hunt said: “These figures reaffirm exactly why we must continue with our efforts to drive down inflation so we can ease pressure on families and businesses.”
Yesterday’s jobs numbers showed pay growth nudged higher and topped expectations, hitting nearly six per cent in the three months to February. There is concern among Bank officials that pay rises that aren’t offset by productivity gains could bake in elevated inflation over the long run.
“The reality is that under the Tories our economy is weaker, prices are out of control and never have people paid so much to get so little in return,” Labour Shadow Chancellor Rachel Reeves said.