London November 16 2022: 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.
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 pivot away from 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% to $1.1901 after the release. Money markets add as much as 10 basis points to rate hike bets, pricing interest rates to peak around 4.65% by August.
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.
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.”
On Thursday, Chancellor of the Exchequer Jeremy Hunt is due to set out budget measures including how the government will subsidize energy bills after the current package finishes in April.
“We are thinking very carefully about all those issues, but just to correct any misunderstanding, the energy price support that we give to families will not end from next April, and I’ll be announcing on Thursday what that support will be,” Hunt said in Parliament Tuesday.