UK inflation rate breaks 3-month stretch of declines with surprise rise to 10.4%

U.K. inflation unexpectedly jumped in February, as food and energy bills continued to rise, placing further pressure on households.

The consumer price index (CPI) increased by an annual 10.4%, above the 9.9% consensus forecast among economists in a Refinitiv poll and up from 10.1% in January. On a monthly basis, CPI inflation was 1.1%, exceeding a forecast of 0.6%.

“The largest upward contributions to the monthly change in both the CPIH and CPI rates came from restaurants and cafes, food, and clothing, partially offset by downward contributions from recreational and cultural goods and services (particularly recording media), and motor fuels,” the U.K. Office for National Statistics said.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 9.2% in the 12 months to February 2023, up from 8.8% in January.

The surprise increase in February marked a break from three consecutive months of slowing price increases since the 41-year high of 11.1% reached in October.

British households continue to contend with high food and energy bills, while workers across a range of sectors have launched mass strike action in recent months amid disputes over pay and conditions.

Sterling rose by 0.4% against the dollar early on Wednesday.

Speaking to the House of Lords Economic Affairs Committee, U.K. Finance Minister Jeremy Hunt on Wednesday stressed that reducing inflation from its current “dangerously high” levels remains at the top of the government’s agenda:

“It’s the prime minister’s first priority to halve inflation,” he said. “Of course, we will do that in a way that maintains, as best as we are able, stability in financial markets. But we should remember that inflation itself is destabilizing, so it is not an answer to say that we’re going to suddenly change our minds and say that it’s acceptable to have an rate of inflation that as destabilizingly high as over 10%.”

He acknowledged arguments that the accelerated pace at which central banks have lifted interest rates in efforts to combat inflation has contributed to recent unrest across multiple sectors of the financial markets:

“You’re absolutely right to say that the speed of interest rate rises is the root cause of the volatility that we’ve seen in recent months,” he noted.

The Bank of England Monetary Policy Committee will adjourn on Thursday to pronounce on interest rates. Last week, the European Central Bank moved to increase its own rates by 50 basis points despite storms in the banking sector.

Bank of England ‘on a knife edge’

The print will pose a further headache for the Bank of England, which has been hiking interest rates aggressively in a bid to rein in inflation and will announce its latest monetary policy decision on Thursday.

Richard Carter, head of fixed interest research at Quilter Cheviot, said that the downward path for inflation will not be smooth, and suggested the Bank of England may be forced to continue increasing the bank rate beyond its current level of 4%.

“The rhetoric from the BoE will continue to be that inflation is the primary concern, however, events in the banking sector have somewhat taken over and the Monetary Policy Committee has been seeing significant divisions on the best way forward,” he said.

The fallout from the failure of Silicon Valley Bank and the emergency rescue of Credit Suisse has added a further layer of complexity to the task facing central bankers around the world.

Last week, the independent Office for Budget Responsibility projected that U.K. inflation would plummet to 2.9% by the end of 2023 — a forecast Carter said was “increasingly ambitious” in light of the Wednesday print.

“How much the banking crisis will have changed this prediction remains to be seen, but it does feel a very punchy estimate,” he said.

Jake Finney, economist at PwC, said the reading was the first setback in the Bank of England’s mission since inflation began falling in November, and highlighted that inflationary pressures are starting to diverge.

“Food price inflation continues to reach new heights and restaurants and cafes prices increased further, while on the other hand, transport price inflation continued its downward trajectory as petrol and diesel prices fell back further,” he said.

Despite the bump in the road, PwC still sees inflation falling throughout most of 2023 to finish much closer to the Bank’s 2% target. Finney nevertheless noted that “the living standards squeeze is not over yet.”

The OBR expects real household disposable income per person, a measure of living standards, to fall by a cumulative 5.7% in 2022/23 and 2023/24.

“The Bank of England’s decision on Thursday remains on a knife-edge. The latest inflation data provides a setback but the Bank of England have made clear they will not be swayed by month-to-month changes in data points,” Finney said.

“We are expecting to see one final 25bp hike from the Bank of England. However, further volatility in the financial markets could turn sentiment towards a no change decision.”