(Bloomberg) — Soaring energy bills drove UK inflation even higher than expected to a 41-year high in October, adding to pressure on the Bank of England to raise interest rates again.
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The Consumer Prices Index rose to 11.1% from a year ago, the Office for National Statistics said Wednesday. That was more than the central bank’s peak forecast for 10.9% and the 10.7% median that economists had expected.
Policy makers led by Governor Andrew Bailey, who testifies to Parliament later Wednesday, have said they’re prepared to raise borrowing costs forcefully to prevent spiraling prices. Inflation is now more than five times higher than the BOE’s 2% target despite eight increases in the benchmark lending rate in the past year.
The figures contrast with the outlook in the US, where speculation is growing that inflation may have peaked, allowing the Federal Reserve to slow rate hikes. Russia slashed supplies of natural gas to Europe since its attack on Ukraine, driving up the cost of electricity in wholesale markets across the region.
“It is still unclear if we are reaching peak inflation for the year, but nevertheless this is a tough period for public markets,” said Andrew Aldridge, a partner at Deepbridge Capital.
The pound rose as much as 0.3% after the release before quickly erasing gains. Money markets add as much as 10 basis points to rate hike bets, pricing interest rates to peak around 4.65% by August.
What Bloomberg Economics Says …
“The only piece of good news from the UK’s October CPI surprise surge is that inflation has probably peaked. With the government’s six month energy price cap now in place, inflation is likely to start edging down. That won’t be enough for the Bank of England to materially scale back the pace of tightening just yet — our base case is for a 50-basis point hike in December. However, the latest batch of CPI and labor market data raises the odds of another 75-bp move at the next meeting.”
–Ana Andrade, Bloomberg Economics. Click for the REACT.
Chancellor of the Exchequer Jeremy Hunt said he’ll help the BOE return inflation to target by delivering “tough but necessary” measures to rein in the Treasury’s budget deficit. He blamed Russian President Vladimir Putin’s invasion for “driving up inflation around the world.”
“This insidious tax is eating into pay cheques, household budgets and savings, while thwarting any chance of long-term economic growth,” Hunt said in a statement. “We cannot have long-term, sustainable growth with high inflation.”
Rising energy prices made the biggest contribution to last month’s inflation figures, despite a government program to soften the impact on consumers. Gas prices surged almost 36.9% on the month, and electricity rose 16.9%.
Inflation would have been 13.8% had the government not introduced an energy price guarantee that limited the increase, the ONS said.
Wage growth is lagging the increase in prices, delivering the sharpest squeeze in living standards in memory and putting pressure on Prime Minister Rishi Sunak’s government to act. The inflation rate for low income households was 11.9% compared with 10.5% for more wealthy ones.
On Thursday, Hunt due to set out budget measures including how the government will subsidize energy bills after the current package finishes in April. He said his aim it to reduce debt while protecting the most vulnerable people.
“With the protective effect of the Energy Price Guarantee so apparent in the data, the chancellor will now be under even greater pressure to maintain the scheme into the foreseeable future,” said Kitty Ussher, chief economist at the Institute of Directors, which represents company executives.
Core inflation, which excludes energy, food, alcohol and tobacco prices, was unchanged at 6.5%. Food and beverage prices jumped 2% over the month, with milk, cheese and eggs all seeing large increases, along with chocolate, jam, tomato ketchup, cooking sauces and carbonated drinks. Ten of 11 food categories rose, the exception being tea and coffee.
The cost of leisure activities rose in price in October. There was a downward effect on prices from transport costs, reflecting a shift toward purchasing second-hand cars.
Petrol and diesel prices fell 0.5% in the month after an increase a year ago.
There was some evidence that the costs facing businesses are easing, with manufacturing input prices rising less in the year through October than in September.
“October could mark a turning point as we expect the headline rate of inflation to start falling in the coming months,” said Yael Selfin, chief economist at KPMG UK. “Looking ahead, the combination of weaker growth and the waning impact of global supply shocks could lead to easing price pressures.”
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–With assistance from James Hirai, Harumi Ichikura and Mark Evans.
(Updates with BI analysis.)
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